Every company need Capital for for buying Assets, for setting up plants and machinery, for growth and for many other things. Infact the day today Cash needs also part of Capital. But it is working capital. And like everything else in finance world, there is cost of capital here Also. The cost of capital differ from type to type. Like debt is lowest, Equity is highest. When the company is operating it is necessary for the company to earn minimum of the cost of capital mix which is company holding. Like if company is holding 50-50 debt and equity, then the Weighted Average After Tax Cost of both is the minimum requirement the company is Need to Earn. I agree that there is no need to pay Dividends every year but if the company is not paying dividend then it is must to Invest that earning where the company will earn something more than cost of capital. If that is happening then that Return from Investment will cover cost of capital partly.
If not invested then it is must to understand that if the money kept ideal in bank account, the inflation is reducing the value of it.
There are some things must remember here while calculating.
- Leasehold assets and for the companies where there is asset light approach accepted, are not part of Capital as the company is paying Rent for them, the term maybe different.
- The trend for the Ratio is important not one year. It is also important to check what is industry average.
- There are some companies which are having big Non-core Asset. Due to This they will receive other income. Most the time it is uncertain, but due to Then you may find surge in the Ratio but that is supposed to Be ignore.
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