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
very broad question but the most important factor is economies of scale. let’s take amazon. building out warehouses and centers is extremely capital intensive. however, it enables faster deliveries and therefore more orders. for many years, amazon refused to be profitable, choosing to spend it money on more and more centers. this enables it to deliver the one day shipping we know and love. many companies can choose to either raise debt to fulfill this or sell shares to raise capital. typically, they choose the latter as it doesn’t put the business as risk and just uses shareholders as an atm.
last year, amazon decided enough is enough and we need to start showing profits for our shareholders. they pulled back on the buildout money and went from losing 30 billion dollars a year to making 40 billion dollars a year to show investors they can be a powerhouse if they want to (their stock price was crashing as investors were losing faith when the market was crashing)
this is not the case with all businesses. a bad example would be selling a dollar for 50 cents. yes, you’ll make tons of revenue. but you’ll never ever make a profit. examples would be wework, casper, blue apron. they were never able to truly achieve economies of scale where they could become profitable if they wanted to because their core business was just too expensive and couldn’t be dialed back.
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