If a company's WACC is 13.4% and its rate of return is 11%, what does this indicate?

When evaluating a company's Weighted Average Cost of Capital (WACC) in relation to its rate of return, it is essential to understand what these metrics signify. The WACC represents the average rate of return a company is expected to pay its security holders to finance its assets, while the rate of return indicates how much profit the company is actually generating from its investments.

In this scenario, the company's WACC is 13.4%, which means that the company must earn a return greater than this rate to create value for its shareholders. Since the company's rate of return is only 11%, this is less than the WACC. Consequently, the company is not generating enough returns to cover its capital costs, thus potentially eroding shareholder value. When a company's returns fall short of its WACC, it indicates that the company is not effectively utilizing its capital and is losing value relative to the cost of that capital.

This understanding supports the conclusion that the company is indeed losing value, as it is unable to meet its required return on invested capital.