Can Enterprise Value Be Negative? What About Equity Value? (14:49)

Yes, Enterprise Value can be negative… 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.

Enterprise Value is the value of core-business Assets to all investors in the company.

Equity Value is the value of all the Assets, but only to common shareholders (equity investors).

And Equity or Shareholders’ 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.

“Current” refers to a company’s Equity Value or Enterprise Value based on its public share price, and it represents the market’s views of the company’s value.

“Implied” or “Intrinsic” refers to YOUR VIEWS of the company’s value.

Current Enterprise Value: Yes, it can be negative

Implied Enterprise Value: Yes, it can be negative

Current Equity Value: No, it can’t be negative (in theory)

Implied Equity Value: Yes, it can be negative

Equity or Shareholders’ Equity (Balance Sheet figure): Yes, it can be negative

How Enterprise Value Can Be Negative

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.

The intuition is that the market expects the company’s core-business Assets to generate negative cash flow in the future, which makes them worth a negative amount.

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.

But even if its cash flow eventually turns positive, its Implied Enterprise Value could still be negative.

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.

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.

Companies like Uber and Snap that keep growing and keep losing more and more money are dealing with this issue.

What about Equity Value?

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).

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.
Fine Print and Qualifications

While these scenarios are possible, they are pretty rare, and they tend not to last for very long.

A company with negative Enterprise Value will tend to turn around, as the market’s view of it shifts, or it will go bankrupt and die if the market’s view was correct.

A company shouldn’t be able to last that long if its core business is worthless!

Often, in real life, you’ll just say the company’s Implied Share Price is $0.00 if you get negatives in these calculations, and you’ll rely more on methodologies such as Liquidation Valuation for distressed companies.

Be wary of anyone who says a company with a negative Enterprise Value is a “bargain” – if you’re just a minority shareholder, that company is under no obligation to distribute cash to you.

So, yes, the company’s share price might be $5.00, and its Cash per Share might be $6.00. But that doesn’t mean much if the company plans to burn through all the cash and never let you have any!