Why you should check out a company’s running costs before investing

Julie Brownlee, Fsp Invest, 17 Aug. 2015

Tags: running costs, operational gearing, investing in shares, investing, high running costs,



When you research different companies to invest in, you’ll come across ones that have high running costs and ones that have much lower ones in comparison.

So does a company’s running costs make a difference? And is it something you should take on board when investing?

Read on to find out…



Working out a company’s running costs


Looking at a company’s running costs is something you should check out before investing. This is because it can make a big difference to a company’s profits.

It all comes down to operational gearing. Operational gearing determines how sensitive a company’s trading profits are to changes in its turnover.

Some companies will have to cover high running costs (fixed costs) whether or not they make a lot of sales. These running costs include salaries and renting out premises.

If a company has high running costs, it tends to have higher operational gearing.

On the other hand, if a company has lower running costs, it tends to mean it has lower operational gearing. This company has more variable costs instead.


Working out the impact of a company’s running costs


Let’s say Company ABC makes R30 million in sales. Its fixed costs come in at R24 million. And its variable costs are R3 million.

This means that Company ABC’s trading profit is R3 million (R30 million – R24 million – R3 million).

If the company sees its sales rise by 10%, this brings the total sales to R33 million. Fixed costs remain at R24 million and variable costs increase to R3.3 million.

This pushes its trading profit up to R5.7 million (R33 million – R24 million – R3.3 million). That’s an increase of 90%.

But if sales fell 10%, the company would see its profits nearly wiped out.


Why you need to pay attention to a company’s running costs


High running costs give high operational gearing. When a company is profitable and things are going well, this is fine. But if the company hits hard times, it means high risk for investors.

Making this worse is companies that borrow a lot of money too.

So there you have it. Why you should check out a company’s running costs before investing.

*********** Advertisement ************

I made the financial mistakes, now you don’t have to.

I wasted years of my life (and tens of thousands of rand) failing at every business opportunity that came my way, I won’t let this happen to you.

With every businesses idea I give you, I’ll hand you the exact, systematic blueprint to making it work!

Get a copy of The Home Business Tycoon, NOW!

***********************************


Related QA

Pic
d.c.heger asked:
MY QUESTION IS – I bought Bitcoin & Etherium some time ago – at first they grew nicely but now they are lower than what I paid for them. Should I [read more]
Published at 04 Apr. 2018 in: Investing 5 shares due to rocket 1 Answer
Pic
kavesh.maharaj.73 asked:
Hi Josh. I would like some advice on TFSA. I can get an interest rate of 7.8% nominal at a bank if I invest the R33k upfront in a fixed deposit [read more]
Published at 19 Mar. 2018 in: Investing Tax free savings vehicle 2 answers
Pic
kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
Pic
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
Pic
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer

Related articles:


Latest:

Comments
0 comments



 
 


Youtube Twitter Facebook

Connect with us:    

POPULAR TOPICS
  • Accelerated Investor
  • Accessories