Which condition can contribute to negative enterprise value?

• A. An extremely large cash balance.
• B. An extremely high market capitalization.
• C. A company with no liquidity.
• D. A company with high revenue growth.

Answer: (A)

Enterprise value is a measure of the total value of a company from all capital providers. It is calculated as market capitalization plus debt and minority interests plus preferred equity, minus cash and cash equivalents. Because cash is subtracted in this formula, a very large cash balance lowers enterprise value. If cash is large enough to exceed the other components, enterprise value can become negative, reflecting that the company has more cash than the combined value of its equity and debt. For example, market cap $2B, debt $0.5B, and cash $3B gives EV = 2 + 0.5 − 3 = −0.5B. Thus, an extremely large cash balance can contribute to negative enterprise value, whereas a high market cap would raise EV, lack of liquidity isn’t a direct driver in the EV calculation, and high revenue growth tends to increase value rather than produce a negative EV.