Cost Structure & Expense Trends Deep Dive
Last updated: 17 September 2025
Objective:
This prompt provides a comprehensive extraction and analysis of a company’s cost drivers, line by line. It identifies one time vs recurring expenses, presents a common-size breakdown of revenue to net margin, sources of operating leverage, provides interpretation and explanations of drivers in each cost line and shows modeling inputs that can speed your modeling of a company’s costs.
Explanation:
Understanding a company’s cost structure is the fastest way to judge margin durability, operating leverage, and the real constraints on profitable growth. This analysis turns the last two annual reports and the most recent interim filing into a common-size P&L with trend and driver diagnostics, linking each expense line (from COGS through tax) to what actually moves it: one-time vs recurring expenses, wages and headcount, supplier terms, input commodities, logistics, software spend, and policy choices on depreciation and amortization.
You’ll see which costs are outrunning revenue, where efficiencies are emerging, and how capex, interest, and effective tax rates shape free cash flow. By quantifying drop-through, effective interest yields, and tax bridges, the output helps you pressure-test guidance, compare peers on like-for-like terms, and build scenarios for margins under different pricing, mix, and inflation paths. In short, it equips you to form a confident view on a company’s future earnings.
As always, be aware that models can make mistakes. At each step, examine the response and challenge information or conclusions that appear erroneous before proceeding to any subsequent steps. If in doubt use a second model with the same prompt to verify the information and generate challenge questions and answers (CoVe process) to correct interpretations of data. Subsequent prompts can be added in a chain of thought conversation to have the model adjust its analysis if errors are identified.
Link to blog post explanation:
N/A
Preferred Model(s):
ChatGPT-5+
Important Execution Notes:
Attach to the prompt the last 2 years annual reports / 10-Ks (with financial notes) and last Quarterly / Semi-Annual report (10-Q or equivalent)
Sample Output:
Copy/Paste Prompt Set:
Important note: Subscribers can use this prompt set for their own analysis. However, the prompt is copyrighted by The Inferential Investor, paywalled, and must not be shared without permission.
Role
You are an equity analyst producing a cost-structure deep dive using ONLY the attached filings:
• Attachments: [FY-1 Annual Report/10-K], [FY-2 Annual Report/10-K], [Most recent 10-Q or interim].
Work in the company’s reporting currency. Cite page numbers for every figure you extract.
Deliverables (in order)
1) Common-size P&L table
• Extract for FY-2, FY-1, and the latest quarter: Revenue; COGS; Gross Profit; R&D; Sales & Marketing; General & Administrative; SG&A if combined plus any sub-breakdown from notes; Depreciation; Amortization; Restructuring/Impairment; Other operating income/expense; Operating Income/EBIT; Interest expense; Interest income; Pre-tax income; Income tax expense; Net income. Include stock-based compensation where it is presented (indicate which line includes it).
• Identify from notes and management commentary any one time expenses that should be normalized. Show these under the table and adjust figures for them.
• Present a compact table with: absolute values and each line as % of Revenue. Add a “Remaining margin” row after each line to show the running margin down to Net margin. Include the latest quarter as its own column (do not annualize unless the filing provides TTM; if TTM is disclosed, show both).
2) Trend and growth analysis
• Compute YoY % growth for each annual line item and Revenue. For the latest quarter, compute growth vs the same quarter last year if disclosed; otherwise note data unavailability.
• Flag lines growing faster than revenue (↑) or slower (↓). Brief one-line explanation beside each flagged line.
3) Cost bucket deep dives (short sections, in income-statement order)
For each of: COGS → R&D → Sales & Marketing → G&A (or SG&A split) → D&A → Other operating items → Interest (expense and income) → Tax:
a) What drives this line? Use MD&A and notes. Identify primary drivers such as wages and headcount, contractor spend, specific commodities or inputs, freight/fuel, data center or cloud hosting, license/royalty fees, facilities/occupancy, advertising, commissions, professional services.
b) Supplier exposure. From notes and risk factors, name key suppliers (if disclosed), what they supply, any concentration, sole-source or long-term agreements, pricing indexation, volume commitments, termination clauses, purchase obligations schedules.
c) Labor terms. Extract enterprise bargaining or union agreements, wage escalation clauses, timing of renegotiations, and any disclosed headcount changes.
d) Trend read. Explain why this line is outpacing or lagging revenue, including mix, inflation, FX, productivity, automation, or one-offs.
4) SG&A sub-breakdown
• From the notes, tabulate SG&A sub-categories (e.g., payroll and benefits, advertising and promotion, commissions, travel, software/SaaS, facilities, legal/professional).
• Show absolute, % of Revenue, and YoY growth for each sub-category with a two-line interpretation of the trends and drivers.
5) Depreciation and Amortization vs Capex
• Extract accounting policies and useful lives for major asset classes and intangibles. Note any policy or life changes across the periods.
• Build a comparison table by period: Depreciation expense; Amortization expense; Total D&A; Capital expenditures (cash flow statement); Capex/Revenue; Depreciation/Revenue.
• Comment on alignment of Depreciation trends with Capex trends and asset life changes. Identify impairments or step-ups from acquisitions.
6) Interest rates and coverage
• Compute effective interest cost = Interest expense ÷ average gross debt (use beginning and end balances; disclose method).
• Compute effective yield on cash = Interest income ÷ average cash and cash equivalents (or cash + ST investments if disclosed).
• Compute net interest rate = Net interest expense ÷ average net debt. Provide interest coverage (EBIT ÷ Interest expense) and note fixed vs variable mix, maturity profile, and hedging from the notes.
7) Taxes
• Effective tax rate each period = Income tax expense ÷ Pre-tax income. Bridge material moves to drivers: geography mix, credits, discrete items, valuation allowance changes, law changes. Compare to statutory rate and explain deltas.
8) Operating leverage
• Calculate drop-through: ΔEBIT ÷ ΔRevenue for FY-1 vs FY-2 and for the latest quarter vs the same quarter last year (if available). Interpret whether operating leverage is expanding or contracting and why.
9) Additional relevant considerations
• Inventory accounting (FIFO/LIFO/weighted average) and inflation pass-through. Freight and logistics costs. Energy or fuel exposure. FX impacts and hedging. Warranty accruals. Litigation or regulatory costs. Lease vs buy decisions (IFRS 16/ASC 842 effects). One-time items and reclassifications. Segment or geography margin differences if disclosed.
Output format
A) One common-size table and one SG&A sub-table (markdown).
B) A short metrics block with: effective interest rates, coverage, ETR, Capex/Revenue, D&A/Revenue, drop-through %, and Net margin by period.
C) Eight concise sections (as in 3–8) with page citations.
D) A 6–10 bullet “What this means for margins” with near-term risks and opportunities, and a “Watch list” of data points for the next filing.
Quality guardrails
• Reconcile table totals to the statements. Clearly label GAAP vs non-GAAP. Call out missing data and any assumptions. Keep commentary evidence-based with page references.