A Simple And Quick Way For Investors To Understand The Cost Structure Of SATS Ltd

SATS Ltd (SGX: S58) is a company with two main business segments, Food Solutions and Gateway Services.

The Food Solutions segment covers services such as airline catering, food distribution, and industrial catering whereas Gateway Solutions is involved with ground handling services of passengers, flights, and cargo.

As an investment, SATS has rewarded its shareholders richly over the last five years – its share price has increased by 122% in that time frame!

SATS’s strong returns could cause investors to be curious about the company. I thus think it could be a good idea to take a look at SATS’s cost structure.

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 structure of SATS, investors can then use the knowledge to form a better opinion on how the company’s profit picture could look like over the next few years.

The diagram below shows SATS’s expenditure in FY2015-16 (fiscal year ended 31 March 2016) and FY2014-15.

Source: SATS annual report

There are a few observations we can draw from the chart.

First, we can see that staff costs dwarf all other costs combined. In other words, effective human resource management is likely to be a key part to the success of SATS’s business!

Next, it is possible that a significant amount of SATS’s costs are fixed in nature, meaning they don’t fluctuate much with changes in revenue. For example, depreciation and amortisation, and premise and utilities are clearly fixed. Staff costs are also likely to be both fixed and variable in nature.

If the volume of business that SATS handles goes up, the fixed cost per unit of business will decline, leading to a higher profit margin for the overall business. The reverse is also true – if the volume of business declines, the fixed cost per unit of business will rise, crimping the company’s profit margin.

Lastly, SATS’s operating cost dropped by 5.8% in FY2015-16 despite an increase in business volume. This is an example of what I mentioned in the paragraph directly above.

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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.