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How is it possible for a company to have a negative enterprise value?

Modified on: 2018/07/17
A:

 

Enterprise value is the measure of a company's total value, including its outstanding equity value, outstanding debt, and cash or cash equivalents. When calculating enterprise value, cash and cash equivalents are subtracted from the market capitalization plus debt, so it is possible for a company to have a negative enterprise value. For example, if a company currently has 10 million shares outstanding and trades at $2 per share, its market capitalization is equal to $20 million. If the same company holds $50 million in cash and cash equivalents on its balance sheet and $10 million in debt, it has an enterprise value of negative $20 million.

A negative enterprise value does not necessarily illustrate a problem for a company. A company with absolutely no debt could still have a negative enterprise value. Since enterprise value is greatly influenced by the company's stock share price , if the price falls below cash value, negative enterprise value can result. This is a possible explanation for the company in the earlier example. Say its normal trading range for the past year was $5 per share rather than $2; this puts its normal enterprise value at $10 million.

As this illustrates, sometimes strong companies may experience a fall in enterprise value that does not necessarily indicate a problem with the company's finances. A normal bear market cycle can contribute to a negative enterprise value. This is why value investors often use the enterprise value multiple to discover good investment prospects among companies with share prices that have been beaten down.


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