What does a higher Weighted Average Cost of Capital (WACC) indicate about a company's ability to create value?

A higher Weighted Average Cost of Capital (WACC) indicates that a company has a higher cost of obtaining capital, which can lead to a lower likelihood of creating value. WACC reflects the average rate that a company is expected to pay to finance its assets. As WACC increases, it suggests that investors require a higher return on their investment due to perceived risk or declining financial health.

When a company's WACC is greater than its expected return on invested capital (ROIC), it implies that the company is not generating sufficient returns to cover its costs of capital. This situation means that for every dollar invested, the company is not creating enough value to justify the investment risk, ultimately leading to value destruction rather than value creation.

In contrast, a lower WACC would enhance a company's ability to create value as it reduces the hurdle rate for investments and allows the company to pursue opportunities that yield returns above the cost of capital.