Which type of institution is given as an example that can have large cash balances leading to negative EV?

• A. Banks.
• B. Manufacturing companies.
• C. Retailers.
• D. Oil and gas producers.

Answer: (A)

Holding large cash balances can drag down enterprise value because cash earns little return compared with the productive use of that capital. In valuation terms, Enterprise Value is roughly equity value plus debt minus cash and cash equivalents. If a company sits on a lot of cash, that cash is subtracted from EV, which can make the implied value of the operating business seem smaller or even negative relative to the capital structure. Banks are the clearest example of this situation: they accumulate substantial cash and cash equivalents as deposits from customers and as reserves to meet liquidity and regulatory requirements. That creates a balance sheet heavy in cash assets, so the cash portion can dominate the EV calculation and potentially lead to a negative EV signal for the standalone value of the business if you focus only on the cash-heavy, low-return part. Other industries—manufacturing, retail, or oil and gas—tend to use cash more for ordinary working capital and capex, not for the same scale of idle liquidity, so they don’t exhibit the same pronounced cash-heavy profile.