For many of these companies, their once avid investors now have alternative investments from which they can earn less risky and more immediate returns. The yield on 2-year US Treasuries has risen to 4.5 per cent, and the yield on 10-year US Treasuries has more than doubled in a year to 4 per cent.
Meanwhile, the tech-heavy Nasdaq index has dropped 37 per cent year-on-year. While it is not possible to say for certain that investors have bailed out of tech shares and into safer investments, the inference is compelling.
When the cost of borrowing was flirting with zero, almost any investment, regardless of its protracted payback period, looked attractive. But as interest rates rise, investors can choose between risk-free, instant gratification and a vague promise of profit sometime in the distant future.
Today’s start-ups, and even many established businesses, have realised that cash flow is crucial to investors. They understand that it signals financial health and an ability to remain in business even through a long economic downturn.
HOW A COMPANY CAN GROW ITS PROFITS
But first, a company needs to grow its profits. There are three ways to do this: Grow sales at constant prices, raise prices or cut costs.
The first is a challenge with the slowdown in economic activity and dampened consumer demand. The second would only be possible if a business has pricing power, which many companies don’t especially if their products and services are highly commoditised.