Why do you subtract cash to get enterprise value, and can enterprise value be negative?

Enterprise value is the net cost of buying the whole business. A buyer pays for the equity and takes on the debt, but also gets the cash sitting in the company, so cash comes off the price. Say the market cap is $1,000 million, debt is $200 million and cash is $300 million. The buyer is out $1,200 million and gets $300 million back, so enterprise value is $900 million. And yes, it can be negative. That happens when cash is bigger than market cap plus debt. With a market cap of $150 million, debt of $50 million and cash of $300 million, enterprise value is minus $100 million. It usually signals that the market expects the cash to be spent. The typical case is a company losing money, like an early-stage drug developer, where investors assume the cash funds losses and never reaches them.

Enterprise value is the net cost of buying the whole business. A buyer pays for the equity and takes on the debt, but also gets the cash sitting in the company, so cash comes off the price. Say the market cap is $1,000 million, debt is $200 million and cash is $300 million. The buyer is out $1,200 million and gets $300 million back, so enterprise value is $900 million. The other reason is consistency. EBITDA doesn't include interest earned on cash, so a multiple of EBITDA shouldn't include the cash either. And yes, it can be negative. That happens when cash is bigger than market cap plus debt. With a market cap of $150 million, debt of $50 million and cash of $300 million, enterprise value is minus $100 million. It usually signals that the market expects the cash to be spent. The typical case is a company losing money, like an early-stage drug developer, where investors assume the cash funds losses and never reaches them. If that company burns $100 million a year, the $300 million is gone in three years, and the share price already reflects it. The second thing I'd check is whether the cash is really free. Some of it may be restricted, held overseas, or owed back as customer deposits. And there may be claims that aren't in the debt figure, like leases, pensions or a lawsuit. So I wouldn't read it as free money. On paper you could buy every share and be paid to own the business, but in practice control is hard to get cheaply and the cash keeps shrinking while you try. A multiple on negative enterprise value means nothing, so I'd value that company on its cash and its burn instead. One convention to note. Strictly, only excess cash should come off, but the usual shortcut subtracts all of it.