The passage discusses the statistical correlations that suggest higher-margin companies earn higher valuation multiples. This means that companies with higher profit margins tend to have higher stock prices relative to their earnings. This correlation benefits shareholders because it increases the value of their investments. Additionally, it benefits the company itself by lowering its cost of capital, which refers to the cost of financing its operations through debt and equity. A lower cost of capital allows the company to invest in growth opportunities, make acquisitions, and maintain industry-leading technology.
The passage also mentions that GE has been taking actions to reduce its own cost of capital, which creates a sense of urgency for Rolls-Royce to pursue strategic actions to restore investor faith in its business. The passage suggests that by improving its execution, capital allocation, and profitability position, Rolls-Royce can increase its valuation and regain investor confidence.
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