Explanation
Cost of Goods Sold is directly linked to profitability of the company through Gross Margin:
Gross margin = (
Revenue - Cost of goods sold) / Revenue
A company that has a moat can usually maintain or even expand their Gross Margin. A company can increase its Gross Margin in two ways. It can increase the prices of the goods it sells and keeps its Cost of Goods Sold unchanged. Or it can keep the sales price unchanged and squeeze its suppliers to reduce the Cost of Goods Sold. Warren Buffett believes businesses with the power to raise prices have moats.
Cost of Goods Sold is also directly linked to another concept called Inventory Turnover:
Inventory Turnover = Cost of goods sold / Average Inventory
Inventory Turnover measures how fast the company turns over its inventory within a year. A higher inventory turnover means the company has light inventory. Therefore the company spends less money on storage, write downs, and obsolete inventory. If the inventory is too light, it may affect sales because the company may not have enough to meet demand.
Usually retailers pile up their inventories at holiday seasons to meet the stronger demand. Therefore, the inventory of a particular quarter of a year should not be used to calculate inventory turnover. An average inventory is a better indication.
Related Terms
Inventory,
Inventory Turnover,
Gross margin,
Revenue* All numbers are in millions except for per share dataMolycorp, Inc. Annual Data
Molycorp, Inc. Quarterly Data
| Dec10 | Mar11 | Jun11 | Sep11 | Dec11 | Mar12 | Jun12 | Sep12 | Dec12 | Mar13 |
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European Shorting
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