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
Every business will have their own explanation but it always comes down to the investors being confident that the company will become profitable in the future.
The easiest to understand is Temu. They operate at a MASSIVE loss because they sell products at a price that often doesn’t even cover the shiping expenses, let alone the cost of manufacturing itself. But that’s ok, because while they do that, they build market share. One day they will eventually start raising the prices and begin turning a profit. Even if they lose some market share, whatever people remain customers will be enough for them to repay the investment… or so the investors believe.
You can also look at Netflix. They operated at a loss because the subscription was just too cheap but that allowed them to build a nice marketshare and now that prices tripled they are still enough to turn a profit even with the appearance of many competitors and the decrease in market share.
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