How do companies keep surviving when their returns are less than cost of capital for many years?

Question

I have decent understanding of every business topic except why business are running with cost of capital 10-12% but they make only 5-8%. If they keep losing at some point the debt becomes unsustainable. How come they keep getting funds?

What’s the point of such business? Is it only to create jobs?

In: Economics

Answer 1

Their returns are 5-8% of SALES. That translates to 15% on invested capital. If they’re paying 10% for their debt, and they’re capital is 50% debt and 50% equity, that means they’re getting 20% ROE.

The only reason to care about profits as a percentage of sales is to compare efficiency of firms in the same industry.