Valuetronics Holdings Limited (SGX: BN2) is an integrated electronics manufacturing service provider headquartered in Hong Kong. It offers a combination of design, engineering, manufacturing, and supply chain support services for electronic and electro-mechanical products.
In a previous article of mine, I looked at Valuetronics’ revenue streams to understand its business. In this article, I will take the next step to understand the company’s cost structure. Doing so is important – after all, a company’s profit is what is left after deducting costs from revenue, and it is a company’s profit that determines the performance of its share price over the long run.
Here’s a breakdown of Valuetronics’ costs for its financial year ended 31 March 2018 (FY2018):
Source: Valuetronics annual report
There are a few useful points to highlight:
1. Raw materials and consumables used accounted for the vast majority (81%) of Valuetronics’ total costs during the year.
2. The second largest cost is related to human resources, which come in the form of staff costs and directors’ remuneration. These costs accounted for 14% of Valuetronics’ total expenses in FY2018.
3. The bulk of Valuetronics’ cost structure is made up of variable costs – as mentioned previously, 81% of the company’s total costs are for raw materials and consumables. Moreover, it is likely that a substantial portion of the company’s human resources-related costs are variable too.
4. With most of its costs being variable in nature, Valuetronics has low operating leverage that allows it the flexibility to adjust its production volume according to market-demand. But, such a cost structure provides little upside in terms of operating leverage to the company in the event of an expansion of production volume.
By understanding Valuetronics’ cost structure, investors can gain a clearer perspective on 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.