Ten Stock Analysis Ratios Used By The Pros: Weighted Average Cost of Capital (WACC)

Eighth Key Ratio :

Weighted Average Cost of Capital (WACC)

WACC is effectively the cost of a business’ assets. A company’s capital is usually funded by two components; equity and debt. A business will have to compensate the holders of these assets which, in a nutshell, is the Weighted Average Cost of Capital. Any activities or projects undertaken by the business must produce a return in excess of WACC to produce a profit. Often overlooked by many investors, WACC is a basic measure of a business’ costs and therefore a key element in estimating the net present value (NPV) of a project or a business. WACC is taken from future cash flows to calculate NPV. The higher the WACC, the more a company is required to make from operations’ leaving less room for error; therefore companies with a higher WACC are higher risk than those with lower WACC.



WACC = (cost of equity x (market value of equity/market value of equity + market value of debt)) + ((cost of debt x (market value of debt/market value of equity + market value of debt)) x 1- Tax Rate)

EPS = Net Income/Number of Share Outstanding

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