An Investor’s Quick Guide To Understanding The Cost Structure Of SIA Engineering Company Ltd

SIA Engineering Company Ltd (SGX: S59) is a company that specialises in providing aircraft maintenance, repair, and overhaul (MRO) services. It currently has over 80 international airlines around the world as customers.

A week ago, my colleague Sudhan wrote about the company’s sources of revenue.

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

I thus thought it would be interesting to dissect SIA Engineering’s costs. Here’s a table showing the company’s cost structure in 2015-16 (fiscal year ended 31 March 2016):

Source: SIA Engineering’s 2016-16 annual report

There are a few observations we can draw here.

First, staff costs and subcontract costs represent 62% of total cost. In other words, a majority of SIA Engineering’s costs are related to human capital.

Second staff costs and overheads together make up 66% of SIA Engineering’s total cost. The two are likely to be fixed in nature and so they represent the operational risks that the company has given the high fixed costs.

A Foolish conclusion

Based on what we’ve seen, we can conclude that SIA Engineering relies significantly on human capital in its business. The company also has significant fixed costs in its cost structure, which is common in service-related businesses.

By breaking down the expenditure of SIA Engineering, investors can better understand the company and thus make more-informed investing decisions.

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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.