Whether overhead costs are rising or falling relative to revenue. A negative trend (improving efficiency) means each dollar of overhead supports more revenue over time, indicating growing operating leverage.
Formula
Description
Measures whether the company is becoming more or less efficient at converting sales effort into revenue. A negative trend (declining SGA/Revenue) indicates improving operating leverage, meaning each dollar of overhead supports more revenue over time.
Interpretation
Below 0 (negative slope) is ideal, indicating improving efficiency. The company is growing revenue faster than overhead costs. A positive trend means SGA costs are rising faster than revenue, which may indicate loss of competitive advantage or sales channel inefficiency.
Related Risk Indicators
Whether gross margins are improving or declining over five years. A positive trend means the company is gaining pricing power or reducing costs. Negative trends in a mature business are a warning sign.
Whether bottom-line profitability is improving or declining over five years. A positive trend indicates the business is becoming more profitable. The most durable improvement comes from expanding gross margins rather than cost-cutting.
The lowest ROIC recorded over five years. A company with a high minimum ROIC (above 10%) maintains strong returns even in bad years, indicating a genuinely strong business with a durable competitive advantage.
Measures the accrual component of earnings relative to total assets. When cash flow exceeds reported earnings, the company has high-quality earnings. Large accruals relative to assets are a red flag for potential manipulation.
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