How Do You Find COGS Composition?

I’m having difficulty finding the size of the inputs in COGS. I’ve strummed through annual and quarterly reports and listened to conference calls, hoping there would be some disclosures. So far I’m coming up empty handed. What I would like to find out is how sensitive a company’s margins are to a large increase in say just one input. For example, say $100 in revenue produces $50 in COGS which steel is a component of. Let’s say steel prices double and the company had to buy at the spot market price and were unable to pass the costs on to customers. If steel makes up just 5% of COGS, gross margins would shrink from from 50% to 45%. However, if steel makes up, say, 10% of COGS, gross margins would fall down to 40%(Sorry for the simplistic example, but I thought it would help explain my question). What’s the best way of gaining this information?

email investor relations or the CFO directly. they might give you a range for cost.

Yep, what dvictr said. It’s 50 / 50 they will give it to you, but they will usually at least give you incremental margins if nothing else (which you should try to back test prior to talking with them as they may lie to you – at least you will have a sense for whether they are being reasonable). You could also read annual reports, conference calls, or analyst notes for competitors which in some cases will provide comparable info. When you get more experienced, you can also use rules of thumb – a lot of companies, for example, seem to have a 60 / 40 ratio of variable to fixed, although it really depends on the company and what kind of products they are manufacturing.

Also, a general investing tip is to be skeptical of companies with excessively high gross margins for what they do – 20% is commodity, 40% is proprietary with some barrier, 60%+ is high barrier or very product specific. The Street loves high margin businesses, but if the margin fundamentally doesn’t make sense for the company, that often signals increased competition in the future. One of my best shorts ever was on a company that should have been a 20% gross margin business (or lower since they were the high cost producer of a commodity) but was getting away with 40% margins due to a legacy contract inefficiency. When the contract expired (not disclosed in the 10-K), the stock went from $30 to $3, and now trades around $1.50.

Also, on that note, it’s worth pointing out that a company with a low margin but super fast turns is probably better than a high margin business with low turns.

Lotta good stuff in the gross margin, that is one of the most important areas to focus on as an investor for a lot of reasons.