{"id":20846,"date":"2019-10-02T18:58:14","date_gmt":"2019-10-02T23:58:14","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=20846"},"modified":"2024-12-29T23:13:51","modified_gmt":"2024-12-30T04:13:51","slug":"negative-enterprise-value","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/equity-value-enterprise-value\/negative-enterprise-value\/","title":{"rendered":"Can Enterprise Value Be Negative? What About Equity Value? (14:49)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Can Enterprise Value Be Negative? What About Equity Value?<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/equity-value-enterprise-value\/negative-enterprise-value\/#How_Enterprise_Value_Can_Be_Negative\">How Enterprise Value Can Be Negative<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/equity-value-enterprise-value\/negative-enterprise-value\/#What_about_Equity_Value\">What about Equity Value?<\/a><\/li><\/ul><\/nav><\/div>\n\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<p>Yes, Enterprise Value can be negative\u2026 and Implied Equity Value can also be negative. BUT we need to be more precise with the terminology and qualify those statements a bit more.<\/p>\n<p>Enterprise Value is the value of core-business Assets to all investors in the company.<\/p>\n<p>Equity Value is the value of all the Assets, but only to common shareholders (equity investors).<\/p>\n<p>And Equity or Shareholders\u2019 Equity is a Balance Sheet figure that has no market value. Net Income, Dividends, and stock-related activities such as issuances and repurchases affect it (see: <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/statements-of-owners-equity\/\" target=\"_blank\" rel=\"noopener\">the Statement of Owner&#8217;s Equity<\/a>).<\/p>\n<p>\u201cCurrent\u201d refers to a company\u2019s Equity Value or Enterprise Value based on its public share price, and it represents the market\u2019s views of the company\u2019s value.<\/p>\n<p>\u201cImplied\u201d or \u201cIntrinsic\u201d refers to YOUR VIEWS of the company\u2019s value.<\/p>\n<p>Current Enterprise Value: Yes, it can be negative<\/p>\n<p>Implied Enterprise Value: Yes, it can be negative<\/p>\n<p>Current Equity Value: No, it can\u2019t be negative (in theory)<\/p>\n<p>Implied Equity Value: Yes, it can be negative<\/p>\n<p>Equity or Shareholders\u2019 Equity (Balance Sheet figure): Yes, it can be negative<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"How_Enterprise_Value_Can_Be_Negative\"><\/span>How Enterprise Value Can Be Negative<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Suppose a company has a market cap (Current Equity Value) of $30 million, no Debt, and Cash of $35 million. Its Enterprise Value is, therefore, negative $5 million.<\/p>\n<p>The intuition is that the market expects the company\u2019s core-business Assets to generate negative cash flow in the future, which makes them worth a negative amount.<\/p>\n<p>If you buy the company, you have to contribute more cash over time to keep it running, so owning the company actually costs you something.<\/p>\n<p>But even if its cash flow eventually turns positive, its Implied Enterprise Value could still be negative.<\/p>\n<p>For example, if its Unlevered Free Cash Flows are very negative for the first ~10 years and turn slightly positive in the last 5 years, and in the Terminal Period beyond Year 15, everything is normal, the Implied EV from the DCF could still be negative, as it was here.<\/p>\n<p>Money today is worth more than money tomorrow, so highly negative cash flows early on hurt us more than positive cash flows much further into the future.<\/p>\n<p>Companies like Uber and Snap that keep growing and keep losing more and more money are dealing with this issue.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_about_Equity_Value\"><\/span>What about Equity Value?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Current Equity Value cannot be negative, in theory, because it equals Share Price * Shares Outstanding, and both of those must be positive (or at least, greater than or equal to 0).<\/p>\n<p>But Implied Equity Value could be negative for the same reasons as described above: It indicates that the market expects the company will keep burning through cash and that even if a turnaround happens, it may not be enough to justify that early burn.<br \/>\nFine Print and Qualifications<\/p>\n<p>While these scenarios are possible, they are pretty rare, and they tend not to last for very long.<\/p>\n<p>A company with negative Enterprise Value will tend to turn around, as the market\u2019s view of it shifts, or it will go bankrupt and die if the market\u2019s view was correct.<\/p>\n<p>A company shouldn\u2019t be able to last that long if its core business is worthless!<\/p>\n<p>Often, in real life, you\u2019ll just say the company\u2019s Implied Share Price is $0.00 if you get negatives in these calculations, and you\u2019ll rely more on methodologies such as Liquidation Valuation for distressed companies.<\/p>\n<p>Be wary of anyone who says a company with a negative Enterprise Value is a \u201cbargain\u201d \u2013 if you\u2019re just a minority shareholder, that company is under no obligation to distribute cash to you.<\/p>\n<p>So, yes, the company\u2019s share price might be $5.00, and its Cash per Share might be $6.00. But that doesn\u2019t mean much if the company plans to burn through all the cash and never let you have any!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn about whether or not Enterprise Value and Equity Value can be negative, the conditions that might cause them to be negative, and why negative values are quite rare in practice.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-20846","biws_kb","type-biws_kb","status-publish","hentry","kb_category-equity-value-enterprise-value"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/20846","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=20846"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}