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A Quick Overview Of Sarine Technologies Ltd’s Cost Structure

Sarine Technologies Ltd (SGX: U77) is an Israel-based company that develops and manufactures precision technology products that are used in the processing of rough diamonds and gemstones into the polished versions you see in jewellery stores.

The company recently caught my attention due to its long-term market-beating performance. Over the five years ended 19 November 2017, Sarine Technologies’ share price had climbed by 181%; in the same period, the Straits Times Index (SGX: ^STI) was essentially flat.

As such, I decided to take a deeper look at the company. Now, as an investor, there are many aspects to learn about a business. But in this article, I will focus on just one – Sarine Technologies’ cost structure.

Here’s a table showing the company’s revenue, various operating expenses, and operating profit in 2015 and 2014:

Sarine Technologies revenue and operating in 2015 and 2014
Source: Sarine Technologies’ 2015 annual report

There are a few observations we can draw from the information in the table above:

  1. The biggest cost component for Sarine Technologies is the cost of sales; it accounted for 29% and 33% of the company’s revenue in 2014 and 2015, respectively.
  2. The company invests significant amounts in research and development (research and development expenses were 12% and 22% of 2014 and 2015’s revenue). This indicates that maintaining technological superiority could be an important factor in Sarine Technologies’ long-term success.
  3. With the exception of cost of sales, the company’s other operating expenses did not change much in 2015 despite revenue having fallen by around 45%. This indicates that these operating expenses are fixed in nature and do not correlate much with changes in the company’s sales volume. This means that the company has high operating leverage. High operating leverage functions as a double-edged sword, in that it can boost profits significantly during good times while reducing profits sharply during rough conditions.
  4. The wild change in revenue in 2015 and high operating leverage found in Sarine Technologies suggests that investors must be willing to stomach a high level of volatility in the company’s business performance should they decide to invest in it.

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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.