Have you ever wondered why some investment projects look good but their returns don’t meet expectations? The issue may be that you forgot to account for the cost of the capital you use—which is exactly where wacc comes in as an essential tool for analysis.

When many people consider investments, they often focus only on the expected returns, but they forget that raising capital has a cost. Whether it’s borrowing money from a bank or getting funds from the owners, both methods involve expenses. This is where wacc is useful—it’s a concept that helps you calculate the average cost of all capital a company uses to operate.

WACC stands for Weighted Average Cost of Capital, or the average cost of capital. It tells you how much a company has to pay to obtain the capital needed to run its business. Simply put: if a company has to pay interest to a bank or provide returns to shareholders, then the total of those expenses divided by the total amount of capital equals wacc.

WACC consists of two main parts. The first is the cost of capital from borrowing, which is the interest the company has to pay to banks or lenders. The second is the cost of capital from owners or shareholders (Cost of Equity), which is the return shareholders expect to receive.

If a company uses capital from only one source, the calculation is straightforward. But when capital comes from both sources, you need a weighted average formula. The formula is: WACC = D/V(Rd)(1-Tc) + E/V(Re). Where D/V is the proportion of debt, Rd is the cost of debt, Tc is the tax rate, E/V is the proportion of capital from owners, and Re is the cost of capital from owners.

Let’s look at a real example. Suppose company XYZ has debt of 100 million baht (60%) and equity of 160 million baht (40%). The loan interest rate is 7% per year, tax is 20%, and the expected return is 15%. When you plug these values into the WACC formula, the result is approximately 11.38%. This means the company must pay an average cost of 11.38% to raise capital for use. Compared with the expected return of 15%, which is higher than WACC, this project is therefore worth investing in.

The lower the WACC, the better, because it means the company’s cost of raising capital is lower. However, remember that WACC does not account for the project’s risk, and it cannot predict future changes such as interest rate fluctuations. Therefore, you should use WACC together with other metrics such as NPV or IRR for a more complete analysis.

What you need to watch out for is that WACC is only an estimate, not an exact figure. Because various factors in the market keep changing, WACC also does not consider the specific risks of each project. If you look at WACC alone, you may miss other important factors.

A good technique is to update WACC regularly, because economic conditions, interest rates, and the company’s debt levels change over time. This helps you track whether the investment is still attractive. If WACC rises beyond expectations, it may be time to consider moving your funds elsewhere.

In summary, WACC is a tool that helps investors understand the true cost of an investment—not just the returns shown by the numbers. Use WACC wisely together with other information, and you’ll be able to make better investment decisions for sure.