A product can look profitable and still be a poor use of capital.
That distinction was easier to overlook when money was exceptionally cheap. If a product generated an attractive gross margin, occupied warehouse space for several months, required extended customer payment terms and used a dedicated production line, management could still focus primarily on the accounting profit it produced.
The cost of tying up the company's money behind that product was often treated as a corporate finance problem.
That separation is becoming harder to justify.
Borrowing costs are materially higher than they were during the ultra-low-rate period. Large amounts of corporate debt will have to be refinanced over the next several years. At the same time, companies are under pressure to improve cash generation, working-capital efficiency and returns on invested capital.
The result is a subtle change in how businesses may need to think about product economics.
The important question is no longer simply:
How much margin does this product generate?
It is increasingly:
How much capital does the company have to commit in order to generate that margin?
That does not mean businesses are about to publish a formal weighted average cost of capital for every product they sell. “Product-level cost of capital” is not an IFRS or GAAP accounting measure.
It is better understood as a management discipline: connecting product profitability with the inventory, receivables, fixed assets, capacity and other capital that a product requires.
And as capital becomes more expensive, that connection matters more.
The hurdle has moved
The broad financing environment explains why the issue is receiving greater attention.
The OECD's Global Debt Report 2026 found that half of outstanding investment-grade corporate bond debt carried an interest cost above 4% at the end of 2025, the first time this had occurred since 2015. Only 14% of the investment-grade stock carried rates of 2% or below, down from almost one-quarter in 2021.
The refinancing pipeline adds to the pressure. The OECD estimates that debt maturing during 2026–2028 represents 24% of outstanding investment-grade corporate debt and 31% of non-investment-grade debt. Much of that debt was issued at rates below the prevailing cost of corporate borrowing.
Bank borrowing tells a similar story.
The European Central Bank's June 2026 corporate lending statistics showed that the composite cost of new borrowing for euro-area corporations increased to 3.79%. New loans of up to €250,000 with floating rates or short initial fixings averaged 3.91%.
The US environment is less uniform. The Federal Reserve's July 2026 Senior Loan Officer Opinion Survey found that banks had left commercial and industrial loan standards broadly unchanged in the second quarter and that some terms had eased. But this does not recreate the near-zero-rate environment companies became accustomed to during the previous decade.
For corporate managers, the consequence is straightforward.
A dollar committed to inventory, receivables or specialised machinery has an economic cost even when the accounting system does not attach an explicit interest charge to the product using it.
The higher the company's cost of capital, the more visible that cost becomes.
Accounting margin and economic margin are not the same thing
Financial accounting is not designed to calculate the economic cost of every unit of capital consumed by a product.
Consider inventory.
Under IAS 2 Inventories, inventory cost generally incorporates purchase costs, conversion costs and other expenditure required to bring inventory to its present location and condition. Production overheads such as depreciation and maintenance can also form part of conversion cost.
That is essential for financial reporting.
But it is different from asking what shareholders and lenders expect to earn on the money tied up while the inventory waits to be sold.
Similarly, IAS 23 Borrowing Costs requires borrowing costs directly attributable to qualifying assets to be capitalised in specified circumstances, while other borrowing costs are generally recognised as expenses. Importantly, IAS 23 explicitly does not deal with the actual or imputed cost of equity capital.
That creates an important distinction between accounting and management economics.
A product can generate positive reported operating profit while producing a return below the company's required return on capital.
The company has made accounting profit.
Economically, however, it may not have created sufficient value to compensate for the capital committed.
This is the basic principle behind measures such as economic value added.
New York University finance professor Aswath Damodaran describes economic value added as the surplus created after accounting for both the return generated by an investment and the cost of the capital invested in it.
Companies normally apply this thinking at enterprise, division or project level.
The next step is to understand it more granularly.
Every product has a hidden balance sheet
An income statement tells managers what a product sells for and what it costs to produce.
A product-level capital view asks what has to sit on the balance sheet to make those sales possible.
That can reveal surprisingly different business models inside the same company.
One product may require significant raw-material inventories because inputs have long lead times.
Another may be manufactured quickly but remain in finished-goods inventory for months because demand is seasonal.
A third may be produced only after an order is received, requiring little inventory, but customers may expect 90-day payment terms.
Another may require specialised tooling or machinery that cannot easily be used for anything else.
Each product can therefore consume capital in at least three important ways: working capital, production assets and dedicated capacity.
Traditional margin analysis can capture parts of these economics.
It may not capture all of them.
This is why the same operating margin can represent very different economic performance.
A product that produces a 15% margin while converting quickly into cash is fundamentally different from a 15%-margin product whose cash remains tied up in inventory and receivables for a year.
Inventory turns time into capital
Few examples demonstrate the issue more clearly than aged alcoholic beverages.
Diageo's fiscal 2026 accounts provide an unusually visible illustration of product capital intensity.
The company's 2026 Annual Report filed with the SEC reported $8.51 billion of maturing inventory at 30 June 2026. Of this, $7.12 billion was whisk(e)y, including $5.59 billion attributable to Scotch.
Most strikingly, approximately $6.94 billion of maturing inventory could only be utilised after more than one year.
This does not mean those products are economically unattractive. Mature whisky can command pricing and brand economics that justify the long investment cycle.
The example demonstrates something more fundamental.
Different products can require radically different amounts of capital before revenue appears.
Diageo itself treats investment in maturing stock as a meaningful cash-management variable. The company reported fiscal 2026 free cash flow of $3.21 billion, up $463 million, with lower capital expenditure and lower investment in maturing stock among the contributors to the improvement. Its return on average invested capital was 13.4%.
The accounting records also show how closely product economics can interact with working capital. Diageo held total inventories of $10.53 billion and trade receivables of approximately $2.60 billion at 30 June 2026.
The lesson extends far beyond beverages.
Aircraft components, semiconductor equipment, luxury goods, pharmaceuticals, machinery, seasonal retail products and construction materials can all have dramatically different inventory cycles.
Time has a financing cost.
The longer a product absorbs cash before converting back into cash, the more capital its economics require.
Working capital is not simply something to minimise
That does not mean companies should push inventory and receivables toward zero.
Working capital performs useful economic functions.
Inventory can protect customers from supply disruption. Longer payment terms can help win important contracts. Safety stock can reduce the risk of lost sales. Large production batches can lower unit manufacturing costs.
The correct amount of working capital is therefore not necessarily the lowest amount.
Recent academic research reinforces this point.
A March 2026 study published in the International Review of Economics & Finance examined EU-based small and medium-sized companies and found an inverted U-shaped relationship between working-capital investment and profitability. In other words, the authors found evidence of an optimal level rather than a simple rule that less working capital is always better. The optimum was lower for smaller and more financially constrained firms.
This distinction is central to product-level capital analysis.
The goal is not to penalise every product that holds inventory.
It is to ask whether the return generated by that inventory compensates the company for committing the capital.
A high-margin product with a long cash cycle may easily pass that test.
A low-margin product with slow-moving inventory may not.
Receivables can change the economics of the same product
Products do not consume capital in isolation from customers.
The same physical product can have different economics depending on who buys it and under what terms.
Imagine a manufacturer selling the same equipment to two customers.
One pays shortly after delivery.
The other requires extended payment terms, customised packaging, dedicated technical support and frequent small shipments.
The headline selling price and manufacturing cost might suggest similar product margins.
The capital economics are different.
The second relationship keeps cash tied up for longer and may consume more administrative and logistical resources.
This is where product profitability begins to merge with customer profitability.
Activity-based costing developed partly to expose exactly this problem.
The classic work of Robin Cooper and Robert Kaplan on activity-based costing showed how companies could move beyond broad overhead allocations and identify which activities were actually consumed by products and customers. Their work evolved from calculating more accurate product costs toward understanding how different product and customer combinations affected profitability.
More recent case research using time-driven activity-based costing has reached similar conclusions. One study of a distribution company found that customers generating the most revenue were not necessarily those generating the most profit once the actual cost to serve them was allocated.
Adding capital consumption extends that logic.
It asks not only what activities a customer or product consumes, but how much money the business must keep committed to support those activities.
Fixed assets create another hidden product cost
Working capital is only one part of the equation.
Products also consume physical capacity.
A manufacturer might produce several products on one flexible production line. In that case, allocating the entire plant's capital cost to one product would make little economic sense.
But other products may require dedicated tooling, specialised machines, unique testing equipment or manufacturing capacity that cannot readily serve another purpose.
That capital has an opportunity cost.
A product occupying a constrained production line also has a less visible cost: the company cannot simultaneously use that capacity to make something else.
As factories become more automated and manufacturing assets become more expensive, understanding which products absorb scarce capacity can become increasingly important.
This is the capital equivalent of activity-based costing.
Instead of asking which product creates the most labour hours or machine setups, management asks which product requires the most invested capital per dollar of economic profit.
Academic work has long explored combining activity-based costing with economic-value-added concepts for exactly this reason. Research on integrated ABC-EVA systems argues that activity costing alone can overlook the opportunity cost of capital and therefore potentially overstate the attractiveness of products that require unusually large investment in assets.
The idea has existed for decades.
What has changed is the economic environment making it more relevant.
ROIC is moving closer to operating decisions
Corporate return-on-invested-capital measures demonstrate the broader direction.
Industrial manufacturer Lincoln Electric said in its June 2026 filing that it uses ROIC when evaluating underlying operating performance. The company reported a 21.9% reported ROIC and a 23.0% adjusted ROIC for the twelve months to June 2026.
FedEx similarly describes ROIC as a measure of how effectively the company deploys key assets and capital to generate profits.
Neither disclosure proves that these companies calculate capital charges for every individual product.
That distinction is important.
The evidence shows companies placing explicit emphasis on returns relative to invested capital. The product-level argument is an inference about where that discipline can logically extend as operational and financial data become more granular.
If management wants to improve corporate ROIC, it ultimately needs to understand what is driving it.
A portfolio of products, customers and projects produces the group-level result.
Aggregate capital efficiency is therefore partly the sum of thousands of smaller operating choices.
Data is making the calculation more practical
Historically, one reason capital allocation remained highly aggregated was simply that detailed calculations were difficult.
A corporate finance department could calculate the company's debt, equity and broad cost of capital.
Determining how much warehouse inventory, receivables, machine capacity and service resources should be attributed to thousands of products was considerably harder.
Enterprise systems are changing this.
Modern ERP, supply-chain, manufacturing and treasury systems can potentially connect order-level revenue with inventory movements, payment terms, manufacturing time and customer collections.
That makes it increasingly possible to construct what amounts to a product balance sheet.
It does not need to appear in statutory accounts.
It can exist as an internal management model.
Management could analyse product revenue and contribution margin alongside average inventory, receivables, dedicated assets and allocated capacity.
A capital charge can then be applied to relevant capital employed.
The result is not accounting profit.
It is a decision-support measure.
That distinction should remain explicit.
A high-margin product can still destroy value
This creates a different way of thinking about portfolio management.
Suppose one product has an exceptional gross margin but requires expensive equipment, large safety stocks and lengthy customer payment terms.
A second has a lower accounting margin but is produced through existing flexible capacity, turns inventory quickly and is paid for almost immediately.
Traditional margin analysis naturally favours the first.
A capital-adjusted analysis may produce a different answer.
That does not automatically mean the second product is better.
The company still needs to consider growth, strategic positioning, customer relationships, competitive advantage and future pricing power.
But management now sees something that was previously obscured.
Margin measures the profitability of the transaction.
Return on capital measures the economics of the system required to make the transaction possible.
For capital-intensive businesses, that difference can be substantial.
The metric can become dangerous if applied badly
There are strong reasons not to turn product-level capital calculations into a rigid corporate formula.
The first problem is allocation.
A factory, distribution centre or software platform may support hundreds of products. Any attempt to allocate its capital value precisely between them involves assumptions.
Those assumptions can create false precision.
The second problem is the cost of capital itself.
Companies should not mechanically assign one corporate weighted average cost of capital to every product regardless of risk.
A mature product with predictable demand, a speculative new product and a regulated long-term contract may have very different economic risk.
Nor should management confuse the company's accounting interest expense with its full economic cost of capital. Equity capital has a required return even though it does not generate a contractual interest charge.
The third problem is time.
New products often perform poorly on capital-efficiency metrics during their launch period because they require upfront tooling, inventory and marketing before reaching scale.
A company that ruthlessly eliminated every product failing a current-year capital hurdle could underinvest in future growth.
There is also a resilience problem.
Holding safety inventory or spare capacity may lower apparent capital efficiency while protecting the company against disruption.
Capital is not automatically wasted because it is temporarily idle.
The purpose of product-level capital analysis should therefore be better decisions, not maximum short-term utilisation.
Financial reporting will remain more aggregated
Investors should also distinguish internal management information from external reporting.
IFRS 8 Operating Segments requires listed companies within its scope to provide information about operating segments and includes disclosures relating to products, services, geographies and major customers. But financial reporting generally does not provide a complete capital account for every individual product.
That is unlikely to change simply because companies develop more detailed internal profitability models.
Product-level cost of capital is primarily useful inside the business.
It can influence pricing, payment terms, product rationalisation, inventory strategy, capacity investment and portfolio decisions.
External investors see the aggregated consequences in free cash flow, working capital, margins and ROIC.
That makes management's capital discipline increasingly important even when the underlying product calculations remain invisible.
Pricing may eventually reflect capital consumption
One of the most interesting implications concerns pricing.
Companies traditionally price products around production cost, market positioning, competitor behaviour and customer willingness to pay.
Capital consumption adds another dimension.
A customer asking for unusually long payment terms is effectively asking the supplier to provide financing.
A bespoke product requiring dedicated inventory is effectively asking the supplier to reserve capital.
An order requiring specialised machinery may need to compensate the company not only for manufacturing expense but also for capacity.
This does not mean businesses will add an explicit “cost of capital” line to customer invoices.
Instead, capital intensity can influence minimum margins, contract terms, order quantities or discount policies.
Two customers purchasing the same product may therefore rationally receive different commercial terms because the economic capital required to serve them is different.
That turns corporate finance into an operating variable.
The portfolio can look different when cash matters
The strongest argument for product-level capital analysis is ultimately portfolio visibility.
Companies often discover that a small group of products creates disproportionate operational complexity.
Some require unique components.
Others produce low volumes but need permanent safety stocks.
Some create considerable receivables.
Others occupy valuable factory capacity without generating attractive returns.
Looking only at revenue can keep such products alive.
Looking at margin can improve the picture.
Looking at capital can change it again.
This is particularly relevant when businesses rationalise product portfolios.
Dropping a low-revenue product that uses almost no incremental capital may accomplish little.
Removing a modestly profitable product that consumes a large amount of scarce working capital or dedicated capacity can potentially release resources for higher-return opportunities.
The relevant metric therefore becomes not simply profit per unit.
It becomes profit relative to the capital required to support the product.
From corporate finance to product design
Cost of capital will remain a central corporate finance measure.
Companies will still calculate enterprise hurdle rates, assess acquisitions and evaluate large capital projects.
What appears likely to change is how far that discipline travels into the organisation.
When financing was exceptionally cheap, businesses could tolerate more inventory, slower cash cycles and less precise distinctions between products consuming different amounts of capital.
Higher capital costs make those differences more consequential.
Better data makes them easier to see.
A product manager may therefore increasingly need to understand subjects once associated primarily with the CFO: working capital, cash conversion, asset utilisation and return on invested capital.
Likewise, finance teams may need to understand operational details that cannot be captured in a corporate WACC calculation.
How long does the inventory sit?
Which production line does it occupy?
When does the customer pay?
How much dedicated capacity does the product require?
Could the same capital earn a better return elsewhere?
Those questions turn cost of capital from an abstract percentage into something far more practical.
A product does not merely consume materials, labour and overhead.
It consumes time.
It consumes assets.
And it consumes money.
When capital becomes more expensive, companies have a stronger reason to measure all three.
References
OECD — Global Debt Report 2026: Corporate Debt Market Outlook
European Central Bank — Euro Area Bank Interest Rate Statistics, June 2026
Federal Reserve — July 2026 Senior Loan Officer Opinion Survey
Harvard Business Review — Profit Priorities from Activity-Based Costing
Universitas Indonesia — Time-Driven Activity-Based Costing and Customer Profitability