An Investor’s Quick Overview Of Raffles Medical Group Ltd’s Cost Structure

Healthcare services provider Raffles Medical Group Ltd (SGX: BSL) has been one of the best performing stocks in Singapore’s market over the past five years. Its share price has more than doubled in that time frame.

The company’s strong return led me to take a deeper look at how it earns its revenue; I shared what I had found in an article I published less than two months ago.

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’d be interesting to follow up on my previous article with a glance at Raffles Medical’s cost structure.

Here’s a table showing Raffles Medical’s income statement in 2015:

Source: Raffles Medical 2015 Annual Report

There are a few observations we can draw:

  1. Staff costs accounted for the biggest portion of Raffles Medical’s total expenses. It is also predominantly a fixed cost. Other costs such as depreciation and operating expenses are also largely fixed in nature. As such, we can make an educated guess that fixed costs account for 60% to 80% of Raffles Medical’s total expenses. Fixed costs are not affected by the amount of services provided. In other words, if there is an increase in the number of patients treated, it could possibly result in Raffles Medical’s profit margin increasing due to the nature of its high fixed-cost structure.
  1. Inventories and consumables used represent only a small portion of the company’s total expenses. So, investors can expect the company to have low working capital requirements when it comes to inventory.

By understanding the cost structure of Raffles Medical, investors can better forecast the company’s future costs and subsequently, its profitability.

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