IB Interview Challenge: Advanced Edition ๐ A company has negative enterprise value. EBITDA is positive. How is this feasible? Take a moment. Consider what enterprise value actually measures before you respond. ๐ก Save this so you donโt get tripped up in your next interview. Drop your answer โฌ๏ธ and tag someone who needs to know this before their superday. At first glance itโs super counterintuitive. But, yes, it happens. Hereโs how to think about it: 1. The Cash Flow Lens: Enterprise value is essentially the present value of projected future unlevered free cash flows, discounted back to today. Positive EBITDA doesnโt mean positive free cash flow. If the market believes future free cash flows are negative on a present value basis, EV goes negative. Even with positive EBITDA today. 2. The EV Formula Lens: EV = Market Cap + Debt - Cash If market cap falls below the net cash, EV turns negative. The market is implicitly saying: between how this business operates and how management allocates capital, the net value of whatโs left over is negative. That could be some combination of business obsolescence, negative future cash flows, and/or poor capital allocation decisions destroying value over time. Bonus Insight: ๐ EBITDA tells you what the business earns today. Enterprise value tells you what the market believes itโs worth tomorrow. A company can be profitable now and still carry negative EV if the market doesnโt believe in what comes next. Follow @FinanceableTraining to level up your IB/PE game every day. #investmentbankingprep #ibinterview #internships #survivefinance #financeiq
Original Description
IB Interview Challenge: Advanced Edition
๐ A company has negative enterprise value. EBITDA is positive.
How is this feasible?
Take a moment. Consider what enterprise value actually measures before you respond.
๐ก Save this so you donโt get tripped up in your next interview.
Drop your answer โฌ๏ธ and tag someone who needs to know this before their superday.
At first glance itโs super counterintuitive. But, yes, it happens.
Hereโs how to think about it:
1. The Cash Flow Lens:
Enterprise value is essentially the present value of projected future unlevered free cash flows, discounted back to today.
Positive EBITDA doesnโt mean positive free cash flow. If the market believes future free cash flows are negative on a present value basis, EV goes negative. Even with positive EBITDA today.
2. The EV Formula Lens:
EV = Market Cap + Debt - Cash
If market cap falls below the net cash, EV turns negative. The market is implicitly saying: between how this business operates and how management allocates capital, the net value of whatโs left over is negative.
That could be some combination of business obsolescence, negative future cash flows, and/or poor capital allocation decisions destroying value over time.
Bonus Insight:
๐ EBITDA tells you what the business earns today. Enterprise value tells you what the market believes itโs worth tomorrow. A company can be profitable now and still carry negative EV if the market doesnโt believe in what comes next.
Follow @FinanceableTraining to level up your IB/PE game every day.
#investmentbankingprep #ibinterview #internships #survivefinance #financeiq
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