So the answer is that a company has more cash than the market value of equity. That makes no sense because the market value of equity takes into account cash, thats why you have to subtract cash from enterprise value in the first place...
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Try this, it's a bit simpler.
If a company currently has 10mm shares outstanding and trades at $2/share, it's market cap is equal to $20mm. Let's say that same company holds $50mm in cash & cash equiv. on it's B/S and also has $10mm in debt. It's enterprise value is -$20mm.
EV = $20mm + $10mm - $50mm = -$20mm
Since a company's stock price is a strong driver of it's enterprise value, when trading ranges dip, the EV of that company dips as well. This doesn't mean there is a problem with the company per say, only that the stock is trading lower than it normally would. A decent amount of small-cap biotech and pharma companies have negative EV due to stock price trading ranges. A lot of times these companies with negative enterprise values are cash rich (more cash than debt) but the market views them in an unfavorable manner.
Because markets are inefficient and your average investor is not financially literate. Also, Santa Clause and the Easter Bunny aren't real either.
If an interviewer (or client) asks this just say something along the lines of, "the equity value of the firm is less than it's cash holdings due to market perception." Or something like "the market's short-sightedness opened the opportunity for some bargain shopping."
If you really want to know why it's because a company's stock is valued on future potential growth (based on historical patterns and projections). Think through it logically. Say a pharma company called XYZ (ticker: XYZ) has $50mm in cash on the books and has a handful of products pending FDA approval as of the first day of the month. Let's also say that on that same day $XYZ, which had been trading around $25.00 with 2mm shares outstanding, was now trading at $35.00 per share and we'll also assume no debt (for simplicity).
So as of now we have an equity value of $70mm and an enterprise value of $20mm (equity-cash).
Now on the 31st of that same month news breaks that all of the products XYZ had pending approval from the FDA on were turned down so they would never make any money for XYZ and they also burned up some resources in R&D (but we'll ignore that last part, again for simplicity). After this news breaks the stock trades down at $10.00 per share (still 2mm shares outstanding).
Now we have equity value of XYZ equal to $20mm, which is less than the $50mm we'll assume they still have in cash holdings, and an enterprise value of -$30mm.
That scenario is rare and would only happen in OTC stocks due to factors such as: illiquidity, fraud, bankruptcy and psychology.
I think we really need to distinguish the difference between equity value and market value of equity.
Equity value is what you get when you do a DCF using FCFE. After discounting the cashflows, you add back the current cash balance, then divide by # of shares.
Market value of equity is simply the price per share x # of shares. It is the amount required to buy a company.
Due to market inefficiency, equity value does not always equal market value of equity.
It can actually happen in pre-revenue companies with a majority of their value tied up in intangibles, and can sometimes be a natural progression of their story as a company.
Imagine a biotech in clinical trials with a single drug they're trying to bring to market. They IPO w/ equity value of $100mm, including $50mm in cash, no debt. So EV is $100mm - $50mm = $50mm.
Now imagine the late-stage clinical trial that they need to get to market fails, and the drug doesn't appear to work. The market believes the drug is a zero, but the company still has cash that it is burning. So negative EV actually makes sense in this case since the majority of the market is assuming the company will continue burning cash over time (you'll sometimes hear people refer to this as "they are trading below cash").
Next, imagine that they figure out the problem wasn't with their drug, but rather how they designed the clinical trial. So they use the remaining cash on hand to re-design and run a clinical trial and it exceeds beyond everyone's wildest dreams! Suddenly the EV of the company skyrockets (as approval is now a near certainty and it'll be a blockbuster, woo!), and then Pfizer takes them out for 50x peak sales estimates.
The end.
The vast majority of these answers are just wrong, in my opinion. In all of theses startup / biotech examples the cash is required for the company to exist as a going concern. It is not excess cash on the balance sheet. Really the whole equity + debt - cash matters in more steady state businesses, even then the only cash that should be removed is in excess of what is required to operate the business.
A company that continues to operate can't have a negative enterprise value, that is ridiculous. Think about it intuitively. If the value of the enterprise is negative you lock to doors, file for bankruptcy and leave all claims holders holding the bag. You do not keep operating.
This is a classic case of over weighting theory from reality.