Revenue and cost of sales

STEP 1How much we sold for, how much it cost to make

The first step of the staircase has just two numbers: the amount sold, and the amount it cost to make what was sold.

Revenue (sales) is the amount a company sold from its main business. The calculation is simple: revenue = price × quantity. So when you see news that revenue grew, first ask, "Was it from raising prices or from selling more?" Revenue that grew only from higher prices quickly turns down if customers leave, while revenue that grew from selling more means factories and stores got busier. Robin Bakery's revenue of KRW 12 billion splits into bread KRW 7.2 billion (60%), cake KRW 3.6 billion (30%) and coffee KRW 1.2 billion (10%). Real companies report this kind of revenue by product in the annual report under II. Business Overview → 4. Sales and orders.

What is inside cost of goods sold?

Cost of goods sold is the money spent directly to make the products that were 'sold'. Even bread baked this year, if it went unsold and stayed in the warehouse, has its cost sitting in the inventories of Lesson 7 until it sells, at which point it moves into cost of goods sold. Robin Bakery's cost of goods sold of KRW 7.2 billion consists of four chunks.

If you sell one loaf for KRW 3,000, KRW 1,800 goes into making it and KRW 1,200 is left. That KRW 1,200 is the loaf's gross profit, and its share of the selling price, 40%, is the gross margin. Conversely, the cost's share of the selling price, 60%, is called the cost of sales ratio. Added together, the two are always 100%.

STEP 2The tug-of-war between raw materials and selling prices

Gross margin is the result of a tug-of-war between selling prices and raw material prices. Pull the rope yourself.

When flour gets pricier, the cost of making one loaf goes up. If you leave the bread price alone, you keep less; if you raise it, you may lose customers. In the figure below, move the raw material price and the selling price. We assume the quantity sold stays at 4 million loaves a year (revenue of KRW 12 billion ÷ KRW 3,000).

If you tap 'Raw materials +20%', raw materials rise from KRW 1,075 to KRW 1,290 and the cost becomes KRW 2,015. If the bread price stays at KRW 3,000, KRW 985 is left, the margin drops by more than 7 percentage points to about 32.8%, and annual gross profit falls 18%, from KRW 4.8 billion to about KRW 3.94 billion. Raw materials are only part of the cost, yet profit swings much more. That is because the entire increase in cost comes straight out of profit.

So how much should the bread price go up? To protect the amount left over, you only need to raise it by the KRW 215 that cost increased (about 7%), but to protect the 40% margin, you need 2,015 ÷ 0.6 ≈ KRW 3,358, a rise of about 12%. The power to raise prices without losing customers even when costs rise is called pricing power. This calculation is exactly why Learn (Economics) Lesson 11 said companies with strong pricing power hold up when prices rise.

Passing costs through takes time

A company's income statement doesn't get worse the day raw material prices rise. Because companies buy raw materials in advance, the old cost flows into cost of goods sold until the cheaper materials in the warehouse are used up. Conversely, selling prices are often raised a few months late because of supply contracts or consumer reaction. So in the one or two quarters right after a raw material price spike, gross margin is squeezed and then recovers once the price increase takes effect. When raw material prices fall, it is the other way around: margins temporarily improve while selling prices are not cut right away.

Knowing this lag lets you read the news more accurately. More than the results right after a "raw material price spike" headline, whether gross margin returns to its original level two or three quarters later shows that company's pricing power. How to read quarterly results continues in Lesson 17.

STEP 3Reading three years of real margins

The income statement in an annual report has three years of numbers side by side. Two divisions show you the trend in margins.

The real consolidated income statement we opened in Lesson 12 has three years side by side: term 56 (2024), term 55 (2023) and term 54 (2022). Divide gross profit by revenue and you'll see that, even for the same company, the margin varies a lot from year to year. Tap the bars.

In 2023, revenue fell about 14.3% from the previous year, but cost of goods sold fell only about 5.1%. As a result, the gross margin dropped from 37.1% to 30.3%. In 2024 it went the other way: revenue grew about 16.2% while cost of goods sold grew only about 3.4%, bringing the margin back to 38.0%. A company with many costs that keep going out even when revenue falls, like depreciation on factory equipment, sees its margin swing even more when revenue wobbles. You often see this in industries like memory semiconductors, where product prices follow a large cycle (Learn (Economics) Lesson 3).

Compare it with Robin Bakery and the difference is clear. When Robin Bakery's revenue grew from KRW 11 billion to KRW 12 billion, cost of goods sold also grew by the same proportion, from KRW 6.6 billion to KRW 7.2 billion, so the margin stayed at 40%. That's because most of its cost is raw materials that rise as more bread is baked, so it moved together with revenue. By contrast, a company running huge factory equipment has a large share of cost that goes out regardless of revenue, so changes in revenue shake the margin a lot. Even at the same gross margin, you need to know the nature of the costs to anticipate future swings.

Find it yourself on DART

Look again at the income statement screen from Lesson 12. This time, follow marks like '(Note 21)' next to cost of goods sold. This number is the consolidated financial statements' note number. In this report, Note 21 is Expenses by nature, which breaks cost of goods sold and SG&A, grouped by function, back down by nature such as raw materials, labor and depreciation. Note 29 next to revenue is Segment reporting, where you can see revenue by business segment.

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1. 1Revenue (Note 29). Revenue by segment is in Note 29, Segment reporting, of the consolidated financial statements; revenue by product is in II-4 Sales and orders.
2. 2Cost of goods sold (Note 21). What the cost consists of is in Note 21, Expenses by nature.
3. 3Gross profit. Divide the three years of numbers on the same line by each year's revenue to calculate the margin yourself.

Screen: DART, Samsung Electronics annual report (term 56) filed 2025-03-11, consolidated income statement. Note titles were checked in the same report's table of contents. This is a navigation example and not an investment recommendation.

How to use it in investing

For gross margin, the direction matters more than a single year's figure. A company like Robin Bakery that has held 40% for several years should be read differently from one that swings between 30% and 38%, even if both show the same margin in a given year. The first is a sign of stable pricing power; the second suggests profits can swing sharply with the business cycle.

Not always. Companies split costs between cost of sales and SG&A in slightly different ways, so comparing gross margins directly across different companies can be misleading. Companies that report expenses by nature may have no gross profit line at all (Lesson 12). That is why it is safer to compare multiple years of the same company, or similar companies in the same industry.