Remember the good old days when capital was as cheap as chips? Those times are officially over. Cheap capital has left the building, and it’s not coming back anytime soon. Here’s why your approach to growth and efficiency needs a major overhaul.
Since early 2022, the financial landscape has transformed radically. With the weighted-average cost of capital (WACC) leaping from under 6% to nearly 9%, corporate giants and startups alike are feeling the pinch. Why does this matter? Because the cost of capital isn’t just a number – it’s a pivotal factor that dictates strategic decisions across the board. As capital becomes pricier, the stakes are higher and the margin for error slimmer. A 1% increase in operating margin consistently boosts company value by 5%, independent of capital cost.
However, the benefit of growth investments dramatically decreases as capital becomes pricier. At a low WACC of 3%, a 1% increase in growth can skyrocket a company’s value by over 100%. But when WACC hits 9% or higher, this advantage dwindles – growth adds the same or even less value compared to operating margins, and by the time WACC reaches 15%, it actually subtracts value. It underscores a crucial strategic pivot: companies should shift focus from aggressive expansion to enhancing operational efficiencies.