In his fifth data update for 2023, Professor Aswath Damodaran (New York University Stern School of Business) focuses on trends in company profitability in 2022, including the impacts of inflation. His analysis includes measures across global regions and industries.

Sector performance: Inflation can increase profits for some firms and lower them for others. Sectors with the highest operating margins include energy (reflecting higher oil prices), a few technology groups (software and semiconductors) and, interestingly, tobacco (a declining, but high-profit business). On the downside, those sectors with the lowest operating margins include four industry groups from the retail space (not surprising, given this sector’s history of low operating margins), the young online software sector, and two industries in “long-term trouble,” namely, airlines and hotel/gaming.

Excess returns: Cost of capital in the U.S. saw its greatest increase last year, from 5.6% at the beginning of 2022 to 9.63% at the start of 2023. In terms of returns, almost 70% of all listed companies across the globe earned returns that were lower than their costs of equity or capital. U.S. companies have the highest percentage of companies that earn more than the cost of capital but still fall short of 50%, his analysis shows. There are clear differences among industry sectors in terms of returns in excess of the cost of capital. Time for companies to revisit hurdle rates, Damodaran advises, and they should figure out how to make money instead of going for “growth, growth, and more growth.”

The post is also helpful in that Damodaran goes into some basics that are sometimes easy to forget. He worries about “insulting” some in the audience, but it’s always a good idea to keep an eye on fundamentals.

Extra: Damodaran’s framework for assessing the impacts of inflation on the value of a private company can be found in an article in Business Valuation Update.