Economic Rent

Does your organization generate “economic rent”? How often can this occur?

Economic rent is the surplus that accrues to capital above the weighted average cost of capital (WACC). Its existence is determined by an organization’s monopoly, enabling it to seek and execute positive NPV projects. This is objectively based on ownership of competitive advantage. Here arises the question: what competitive advantage the organization possesses, and for how long…

The conceptualization of economic rent is significant in that sometimes the lease of liquidity assets leads to outperforming real competitive advantage.

The so-called “superiority of the store” nicely illustrates this point. In principle, a restaurant might serve as an analogy. Let’s compare two restaurants run by Beliashvili. One owns the premises, the other operates on lease. The former has free cash flow of 100,000 GEL per month, while the latter pays rent of 80,000 GEL. In your opinion, which organization has better management? Which organization is more profitable?

That the asset is not utilized does not mean there is any competitive advantage for the business, as one must consider alternative income losses resulting from non-use of the asset… Who knows when the time will come for the saintly revenue generated by the best (functioning) use of the asset to surpass the revenue earned from the revenue generated…

Thus, it’s almost always a mistake when the valuation of an organization does not include a consideration of economic rent. Failing to properly assess what competitive advantage an organization has can lead to errors in long-term profitability forecasts…

Check out the provided YouTube link; the author has an interesting perspective: