Cost of Goods Sold

Cost of goods sold ("COGS" or "cost of sales"), refers to all of the expenses directly related to the production of goods by a company. COGS excludes indirect costs, such as overhead and sales & marketing. COGS is deducted from revenues to calculate gross profit and gross margin. 

How can I use data about a company's cost of goods sold when investing?

• Similarly to profits, you can use a company's COGS to gauge stock price movements. The cost of goods sold is usually inversely related to profits if revenue remains the same. For example, a bakery sells bread for $5 each, and its total cost of producing each bread is $3. If it sells 200 loaves of bread, its total profit will be $400. However, if it still sells the same number of bread, but the cost of producing each bread increases to $4, its total profit now reduces to $200 even though revenue remains the same. Thus, a company's rising cost of goods sold may sometimes result in a fall in earnings and therefore, its stock price.
• However, the cost of goods sold and profits can increase at the same time if demand rises. In a booming economy where aggregate demand increases due to increasing spending and consumption, companies can charge a higher retail price, causing both revenue and cost of goods sold to increase. In fact, in this case, revenue will rise higher than that of the cost of goods sold, causing net profits to grow too.
• However, the absolute cost of goods sold is not the only factor affecting stock price movement as market sentiments play a part too. If a higher cost of goods sold pushes down the company's profit but still beats analysts' expectations, investors may take this as a buy signal and push up the demand and price of its stock.

‍