Cost management is seen as a competitive advantage for companies.

The better control a company has over its costs and expenses, the more profitable it is likely to be.

So, when reading through financial statements, US stock investors should pay attention to a company's costs and expenses, often presented as the cost of revenue and OPEX.

But what are they exactly?

Let's first look at the cost of revenue.

Cost of revenue is the direct cost of making a company's products or providing services.

Items covered in cost of revenue are determined by what type of businesses a company operates.

For manufacturers, Tesla, for example, wages paid to workers, material costs, and equipment depreciation

directly tied to production are included in the cost of revenue.

But for fast food companies like McDonald's, the cost of revenue may come down to waiters' wages, cost of ingredients, rent, and utility bills among other costs.

We can get gross profit by subtracting the cost of revenue from operating revenue,

and the ratio of gross profit to operating revenue is gross margin.

Generally, a high gross margin may indicate a low level of competition, or a deep moat, which refers to competitive advantages that set a company apart, such as brand awareness, technologies, or economies of scale.

To analyze a company's gross margin, we can compare it to its historical levels and the industry average.

Take Tesla as an example.

The company has an increasing gross margin from the fiscal year 2018 to 2022, as the data had been shown on moomoo.

Its rivals NIO and XPENG, also US-listed EV makers, have a gross margin of 18.88% and 12.5% for 2021, respectively, far lower than Tesla's 25.28% in the same period.

What drives Tesla's higher gross margin might include its global brand recognition and its efforts to reduce costs.

Now, let's move on to operating expenses, or OPEX, which can come down to two major categories.

First, selling, general, and administrative expenses, or SG&A.

SG&A mainly includes wages of salespeople and administrative staff, marketing costs, travel expenses, and the cost of office supplies.

US stock investors should monitor the percentage of SG&A accounts for operating revenue.

A company with a lower SG&A ratio may run its business with higher efficiency.

Or it has higher operating revenue thanks to its greater brand influence or higher bargaining power with its clients.

At the same time, we may compare the growth rate of SG&A to that of operating revenue.

If its SG&A expenses grow faster than operating revenue, the company may face pressure in sales, overshadowing revenue growth.

The other major category in OPEX is R&D expenses.

On the one hand, it's not a wise idea for a company to keep its R&D expenses well below the industry average because it may not invest enough money to develop technical competencies and build its moat.

Yet, it's not to say that R&D expenses should be as high as possible.

High R&D expenses may eat into a company's profits.

Meanwhile, burning too much money in R&D may not be sustainable.

Research and development involves risks. Investment may not be recouped if the new product is no longer relevant or the project turns out to be a failure.

Such financial losses can put a heavy strain on the company, which might even affect its normal operations.

Considering the operating expense ratio, which refers to the percentage OPEX accounts for operating revenue,

it should not be too high to hurt a company's profitability.

And it would be better if the ratio remains stable or declines over time because a rising OPEX ratio may indicate the company faces problems in generating stable profit in the future.

Finally, let's move on to the operating income, which equals operating revenue less cost of revenue, and less OPEX.

Operating margin is the ratio of operating income to revenue.

It measures how profitable a company's primary business is.

A good company usually grows steadily with a higher-than-average operating margin.

Again, let's take Tesla as an example.

For the fiscal year 2018-2022, the EV maker saw its operating margin grow from -1.18% to 16.98%, thanks to a rising gross margin and declining OPEX ratio.

This suggests the company becomes much more capable of making money from its primary business.

Compared with its peers, NIO and XPENG's operating margins were -12.44% and -31.35% in 2021, respectively, far lower than Tesla's 12.07% for the same period.

To wrap up, a company's competitiveness is affected by its ability to control costs.

Costs incurred by the company mainly come down to the cost of revenue and OPEX.

We get operating income by subtracting the cost of revenue and OPEX from the operating revenue.

A company is more profitable with a higher operating margin.

Lower costs and higher operating income might make a company more competitive.