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QuestionsCategory: Financials QuadrantHow to find out whether can COGS/SGA expenses be reduced?
Zhi Ming Cheah asked 2 years ago

Financial Checklist No 12: can COGS/SGA expenses be reduced?
May I know how can i find out whether it can be reduced?
Based on your noted, you mention If revenue increases but net profit margin decreases, which mean that they manage the expenses poorly, therefore i can conclude that their expenses cannot be reduced?
same for gross profit margin, if a company experience increase revenue but decrease gross profit margin, i can conclude it its expenses cannot be reduced?
Or i need to dive deeper into their business, see where are their expenses, read on how they plan to improve efficiency to justify this?
This is in the financial checklist so i was thinking perhaps there is a particular financial ratio/financial figure i should look on to consider this checklist.

2 Answers
Jieren Zheng answered 2 years ago

I think we can start with looking at their historical trends for these expenses, and perhaps either the business or the nature of the industry they are in.

You can look at their prior years of annual reports to see if there are similar instances and how they manage it as well.

Different industries have different % of expenses for those, so please be mindful when comparing companies.

 

 

Victor Chng replied 2 years ago

Thank you JR

Jieren Zheng replied 2 years ago

Welcome!

Victor Chng answered 2 years ago

Hi Zhi Ming,
 
I think Jieren have explained most of it. 
 
I personally look for company with increasing revenue and focus more on their gross margin. The key is to understand is the situation of decreasing GPM temporary or permanent. If it is temporary then the margin will increase which eventually increase profit. 
For expense, I will monitor but I don;t put much focus on expense to reduce because there is always a limit to how much you can cut. 

Zhi Ming Cheah replied 2 years ago

Thank you jieren and victor!

Victor Chng replied 2 years ago

Welcome :)