Indonesia Based Companies Pay 12% for the Funds Used to Run Their Business

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According to our recent survey, the average Indonesia-listed company pays 11.6% for the money it uses to run its business. This rate is the Weighted Average Cost of Capital (WACC). About 30% of these funds come from borrowing, while the remainder comes from the more expensive equity market.


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A key input to company valuation is the calculation of the cost of capital. Analysts consider the cost of debt and the cost of equity to calculate this value. The mix of these two sources of capital that a business uses determines its WACC.

Companies use this cost of capital as a “hurdle” rate, seeking projects that have profitability above this minimum desired return. Financial analysts use the cost of capital as an assessment of the riskiness of the company’s future cash flows.

When an analyst assigns a high cost of capital, she thinks that the company’s future cash flows are worth much less than their nominal forecast value. In such a case, she “discounts”—or reduces—those future cash flows by this high cost of capital.

It may be helpful to think about discounting with a personal example. Imagine you lent one hundred dollars to a stranger for one week vs. lending the same amount to your most trusted friend. For the stranger, you assign a high risk that you will get that money back; hence you will discount (reduce) its one-hundred-dollar value. If you thought there was a 50% chance you would get the one hundred dollars back and an equal chance you would get nothing, the discounted value would be fifty dollars. For the friend you may have a minimal reduction so the discounted value could be $95.

The Indonesia stock market has about 521 listed companies.

The top 5% of listed companies (26 companies) account for 63% of the market capitalization, making Indonesia a relatively highly concentrated market in ASEAN. The most concentrated market in ASEAN is Singapore, where the top 5% of listed companies (36 companies) account for 74% of the market capitalization.

In this research, we reviewed available research and surveyed four sell-side research operations in Indonesia. The survey collected data related to 17 different Indonesia stock exchange listed companies.

The average WACC that analysts calculated in their recent discounted cash flow valuations was 11.6%. This average did not take into consideration the WACC for individual companies or sectors but just attempted to find the average for all surveyed companies used in Indonesia.

Of the total observations, the highest WACC was 16.3%, and the lowest was 9.0%.

Click here to learn the average WACC for Thailand


DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.

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Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.