What Investors Should Know About Japan Foods Holding Ltd’s Cost Structure

Japan Foods Holding Ltd (SGX: 5OI) is one of the leading Japanese restaurant chains in Singapore. As of 30 September 2017, Japan Foods has 48 restaurants in Singapore under various brands, and 21 restaurants outside of Singapore in Malaysia, Vietnam, Hong Kong, and China. The company’s restaurant brands include Ajisen Ramen, Menya Musashi, and Osaka Ohsho.

In a previous article, I looked at Japan Foods’ revenue streams to help investors better understand its business. In this article, I want to take a step further and look at the company’s cost structure.

Here’s a table showing a breakdown of Japan Foods’ costs for FY2017 (fiscal year ended 31 March 2017):

Source: Japan Foods FY2017 annual report

There are a few key observations I have:

1. Raw material costs (purchases of inventories) accounted for only 16.0% of the company’s total costs in FY2017.

2. The other three main costs – rental, employee compensation, and depreciation – respectively accounted for 33%, 28%, and 8%, of the company’s total costs. In other words, these three costs collectively accounted for about 69% of Japan Foods’ expenses in FY2017.

3. What this means is that, most of Japan Foods’ costs are fixed in nature, since rent, salaries, and depreciation are largely fixed costs. The only big cost-category that is variable in nature is raw material costs (you have to purchase more raw ingredients if you sell more food).

4. So, the presence of high fixed costs as a proportion of total costs mean that any change in sales volume for Japan Foods will disproportionately impact its profitability.

By understanding the different cost components within Japan Foods’ cost structure, investors can better estimate its future 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. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.