Companies have two fundamental ways to boost their profitability: increase revenue growth or cut costs.
Established companies in mature markets may have limited scope for accelerating revenue growth, so may need to focus on cutting costs to improve profitability.
Fast-growing early-stage software companies, for example, may be able to grow their way to profitability, by expanding revenue faster than their costs.
Databook generates an insight that estimates whether revenue growth or cost efficiencies should be the priority for a company over the next two to three years.
To see this insight:
- Search for the company
- Choose Value Drivers from the menu on the left
- Select the Change in Cost Position insight
- Read the Key Takeaway section of the insight
The Key Takeaway explains:
- The amount of costs that a company needs to cut to meet analyst forecasts
- Whether the company is likely to be able to achieve these cost efficiencies, based on past trends
- The proportion of the company's expected profitability improvement that will come from cost-cutting vs revenue growth.
To generate this insight, we use analyst revenue and profit forecasts to calculate how much of the expected profit will come from sources other than expected revenue growth (scaling at the latest operating margin).
Cost take out is a forward-looking metric so should be viewed as an estimate.
You can find out more here about the data we use to generate insights.