Understanding The Cost Structure Of StarHub Ltd

StarHub Ltd (SGX: CC3) is one of the three telecommunications companies in Singapore.

In a previous article, I had looked at the different ways StarHub earns revenue. I thought it’d be interesting to follow up with how StarHub spends its money. In other words, I want to take a closer look at the company’s costs.

Here’s a summary of StarHub’s operating expenses in 2015 and 2014:

Source: StarHub 2015 annual report

There are a few observations we can draw from the table above.

First, StarHub’s cost of sales is made up of three separate items, namely, cost of equipment sold, cost of services, and traffic expenses. These collectively account for 51.4% of StarHub’s total operating expenses in 2015.

Second, StarHub had a significant non-cash expense of S$271.4 million stemming from depreciation and amortisation of assets. This expense has no impact on the cash-generating ability of StarHub.

But, the depreciation and amortisation of assets also means that the assets in question are ‘used up’ over time – they could need replacing in time to come and that would be an occasion when StarHub has to pony up the cash.

Third, in terms of classifying StarHub’s expenses in the fixed or variable camp (fixed expenses do not fluctuate much with the amount of revenue StarHub earns; variable expenses do), depreciation and amortisation, staff costs, repairs and maintenance, and operating leases are predominantly fixed. The bulk of cost of sales, on the other hand, should be variable.

A Foolish takeaway

One way for a company to build value for its shareholders is to grow its profits steadily over time. As such, it is important that we understand both variables that impact a company’s profit – its revenue and cost.

By understanding the cost breakdown of StarHub, an exercise that we focused on in this article, we can use the knowledge to form a better opinion on how StarHub’s profit picture will look like over the next few years.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.