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It's not just about profitability though. I'm a bit rusty with my corporate finance, but internal rate of return (IRR) and weighted average cost of capital (WA
by three_seagrass 6y ago
It's not just about profitability though.
I'm a bit rusty with my corporate finance, but internal rate of return (IRR) and weighted average cost of capital (WACC) can dictate that even if an employee is making more than what they cost, the money could still be better allocated elsewhere.
- eigenvalue 6y agoThe metric that tends to matter in this is ROIC, but since software/internet companies tend to be pretty "capital light", they generally already have a very high ROIC. Unless the company can deploy that money in new growth projects that they aren't already going after, or in accretive acquisitions (hard to do when tech valuations are so high), it probably makes sense to do what they are doing.
- notyourwork 6y agoDoes "allocated elsewhere" imply not at the company or performing another task? Those are quite different.
- jldugger 6y agoSure, it's a simplification, but the point kind of stands -- if you have a net positive outcome after adjust for cost of capital, you should seek that capital out to make it happen. Or maybe decrease a dividend or buyback program.