DAY2 Education : Lower Costs and Expenses Means Better?


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【Investor Education】11 days of Financial Statements Column 

DAY1 Education : Sustainable Competitive Advantages Explained 

Hey, tigers:

Today is the second day of "Learn US financial reports for beginners ".

In this article, I mainly introduce: Is less cost and expense better for listed companies? three key metrics of ''Operating Expenses'' in the income statement : SG&A expenses, R&D expenses, and depreciation expenses.

By learning these three metrics, we can assess the cost management capability of a company.

1. Selling, general and administrative expenses(SG&A Expenses)

Selling, general and administrative expenses, as its literal meaning, includes selling expenses and administrative expenses.

Selling expenses are the costs of hiring people, advertising and marketing to sell its products; administrative expenses are the costs of corporate management, including travel, hospitality, and salaries, etc.

This concept seems simple, right? But I would remind you here that the ratio of SG&A Expenses/Operating Expenses is very critical, which can have hidden information.

Let me give you an example of Ford in the auto industry.

During the past 5 years, the SG&A Expenses accounted for 54% of total operating expenses, which means that Ford was paying very high costs in this section.

If its product sales are low, investors' money can hardly return. Once the company with high SG&A expenses is trapped in financial crisis, investors are likely to suffer great losses.

So you need to be careful about companies that are stuck with high "SG&A Expenses".

2. Research and development expenses(R&D Expenses)

We all know that technology drives productivity. But is it really better to spend more on research and development no matter what?

Of course not. Technology is changing rapidly nowadays. Excessive R&D expenses not only consume a lot of human and financial resources, but also make a company's operation vulnerable once the company's research is disrupted by other disruptive technologies.

Warren Buffett has a principle when reading financial reports: companies that must spend heavily on R & D are at competitive disadvantage.

Once these technologies become obsolete, the company’s long-term prospects will be in jeopardy. Therefore, investors should be particularly cautious when investing in companies that consistently invest high amounts of investment in R&D.

3. Depreciation and amortization expenses

Depreciation and amortization expenses are usually of great importance in the manufacturing industry. The property, plant, and equipment purchased by a company will eventually be scrapped due to wear and tear.

They are called depreciation and amortization expenses in the income statements.

Suppose your company purchased communication equipment worth USD 200,000 this year. The economic life of the equipment is 10 years.

According to the regulations of the U.S. IRS, the $200,000 expenditure cannot be expensed at one time, but shall be included in the depreciation expenses of each year, i.e. the 10-year schedule.

In other words, the annual depreciation expense is: USD 200,000 / 10 years = USD 20,000 per annum.

Regarding this equipment, the annual depreciation expense is USD20,000, which is amortized year by year. After 10 years, the equipment will be scrapped.

As you see, depreciation and amortization is applied to average out the expense of property, plant, equipment over its economic life.

While there is nothing wrong with this calculation method, many companies are abusing this convention.

For example, some companies will try to extend the depreciation time, in order to create more profit for the current period.

4. Is less cost and expense better for listed companies?

With these three subjects in mind, let's go back to the original question:Is less cost and expense better for listed companies?

Of course not! But why?  Because a company reduces employee benefits and wages in order to cut costs, then the company's operation will have problems.

If you were working for this company, you would surely leave. Therefore, excessive cost control might only reduce brand value or lead to high employee turnover.

Increasing revenue and reducing costs are equally important. Both of them are designed to increase income, which determines whether the company is competitive or not.

In other words, we need to be more concerned about how much money a company has left.

we can understand that cost reduction and efficiency increase also need to pay attention to the basic welfare of employees and so on, which can maintain a stable and long-term development of a listed company.

Okay, today's content is over. This is also the key content of our "US Stock Financial Statements for Beginners" lesson 5.

Today's Interaction: Comments Win 20-50 Tiger Coins! 

Modify on 2022-09-29 12:21

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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  • JLSE
    ·2022-09-26
    TOP
    👌👌👌//@StonkerLL: Yayayaya papaya//@koolgal: "Is lower costs and expenses better?" That is a thought provoking question when analysing a company.Lesson 2 - Today I learnt that that lower costs and expenses are not necessarily better.  While it is important to reduce expenses, it is also critical to look at staff welfare too.  I also learnt that SG&A, R&D and Depreciation can also be a subject of misaccounting like Depreciation time span can be extended to make the accounts look good. There are certainly many implications and nuances when analysing a company.  Thanks @Tiger_Academy  for an excellent lesson presented in an informative and interesting manner.  I certainly look forward to Lesson 3.
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  • LMSunshine
    ·2022-09-23
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    Thx loads @Tiger_Academy for the detailed sharing,appreciate it loads🤗 Wow it’s a lot more difficult to understand about expenses e.g.Alphabet spends a lot on R&D but the stock still did very well?
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    • LMSunshineReplying toAqa
      Welcome,got coins to collect must share🤗
      2022-09-24
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    • LMSunshineReplying toCYKuan
      Welcome my dear🥰
      2022-09-24
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    • LMSunshineReplying toGoodLife99
      Welcome,got coins to collect must share🤗
      2022-09-24
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  • koolgal
    ·2022-09-26

    "Is lower costs and expenses better?" That is a thought provoking question when analysing a company.

    Lesson 2 - Today I learnt that that lower costs and expenses are not necessarily better.  While it is important to reduce expenses, it is also critical to look at staff welfare too.  I also learnt that SG&A, R&D and Depreciation can also be a subject of misaccounting like Depreciation time span can be extended to make the accounts look good. 

    There are certainly many implications and nuances when analysing a company.  

    Thanks @Tiger_Academy  for an excellent lesson presented in an informative and interesting manner.  I certainly look forward to Lesson 3.

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  • pekss
    ·2022-09-23
    It is also important to compare the R&D costs and depreciation and amortisation expenses of companies in the same industry for a fair comparison if a company is overspending compared to its peers.
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    • ngph
      Indeed, that will be a fair competition [Strong]
      2022-09-24
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    • eveev
      Good point!
      2022-09-23
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  • Fenger1188
    ·2022-09-24
    感谢 @Tiger_Academy 精彩分享👍🏻👍🏻👍🏻原来上市公司成本费用不是越少越好,员工和公司营运不能随意削减,那样会影响公司正常发展。这次的课程让我受益了❤️❤️❤️
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    • Aqa
      同意!我们受益不浅! [Strong]
      2022-09-24
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  • Success88
    ·2022-09-23
    Thank learn a lot from this training. Didn’t know R&D is a excess expense. They will be good when R&D done good product and can get potential customer
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    • Success88
      Thanks
      2022-09-25
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    • breAkdaWn
      how much of RnD is required? I think it's another name for perks for management. ! hardly see any results of this so called RnD. best results of RnD I have seen is Fisher n Paykel appliances now bought over by Haier
      2022-09-24
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    • Aqa
      Yes in a lot of company R&D is thw biggest expenditure.[Strong]
      2022-09-24
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  • MasterStonker
    ·2022-09-26
    Yayayaya papaya//@koolgal: "Is lower costs and expenses better?" That is a thought provoking question when analysing a company.Lesson 2 - Today I learnt that that lower costs and expenses are not necessarily better.  While it is important to reduce expenses, it is also critical to look at staff welfare too.  I also learnt that SG&A, R&D and Depreciation can also be a subject of misaccounting like Depreciation time span can be extended to make the accounts look good. There are certainly many implications and nuances when analysing a company.  Thanks @Tiger_Academy  for an excellent lesson presented in an informative and interesting manner.  I certainly look forward to Lesson 3.
    Reply
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  • Aqa
    ·2022-09-24
    Most important in Financial Statements is Net profit after taking off: (1.’Selling, General & Admin Expenses’. 2. R& D Expenses & 3. Depreciation Expenses). Seealso Staffwelfare & company LT dvlpmt!
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    • LMSunshineReplying toAqa
      Welcome,always happy to share🤗
      2022-09-24
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    • AqaReplying tokoolgal
      Thanks you for finding this post & leave comment. 😊🍀🚀
      2022-09-24
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    • koolgal
      Thanks for sharing 😍😍😍
      2022-09-24
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  • StickyRice
    ·2022-09-23
    Very good information thanks [Miser][Miser][Miser] @Success88 @SPOT_ON @hengsley @HelenJanet comment for poins 🤙
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    • SPOT_ON
      [Happy] [Happy] [Happy] [smile]
      2022-09-23
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  • rL
    ·2022-09-23
    Thank you! Useful! 50coins please [Grin]
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    • Aqa
      Yes i also hope all get the 50coins
      2022-09-24
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    • LMSunshine
      🤣
      2022-09-23
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  • RDPD富爸穷爸
    ·2022-09-24
    I appreciate the time and effort on the content you are sharing here. It benefits me and surely the tiger community. Thank you 🙏
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    • RDPD富爸穷爸Replying toAqa
      🙏
      2022-09-24
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    • Aqa
      Thanks for comment & like!😊🚀
      2022-09-24
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  • 我i168
    ·2022-09-24
    Great series! Appreciate! SG&A is somewhat more direct and can be adjusted in short term while R&D expense is driver for long-term growth. Yeah looking at depreciation from capital efficiency and...
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    • Aqa
      Good comment![Strong]
      2022-09-24
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  • Yonhuat
    ·2022-09-23
    What is then a good % for r n d ? Tech companies with no r n d expenses often gets left behind the innovation curve. good to know what was spent
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  • breAkdaWn
    ·2022-09-23
    agree about Ford. SG n A . their salaries are insanely high for the management. no wonder Ford share prices so low
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  • hlw8888
    ·2022-09-23
    nice sharing. thks.
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    • Aqa
      No problem. Thanks.
      2022-09-24
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  • ngchris
    ·2022-09-23
    good content
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    • Aqa
      [Strong][Heart]
      2022-09-24
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  • Nagoken
    ·2022-10-27
    Lower expenses and lower cost is a form of cost savings, but whether the company is profit or not.,other factors come to play
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  • serenityj
    ·2022-10-27
    lower cost and expenses doesn't mean it is better.  it depends in the overall company portfolio
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  • GeorgeOr
    ·2022-09-23
    thanks for sharing
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  • Katy Pen
    ·2022-09-26
    👍
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