Favor Companies With Clear Cost-Cutting Plans That Drive Earnings Growth
- Max Teh
- Apr 23
- 4 min read
Updated: Apr 26
KEYPOINTS
🔑 Earnings growth drives long-term returns — and disciplined cost optimization is one of the most reliable ways to expand margins and accelerate it.
🔑 Look for concrete, strategic cost actions (e.g. exiting low-margin segments, supply chain efficiency), not vague “cost control” commentary.
🔑 Map cost savings to the income statement — understanding whether they impact COGS, SG&A, or R&D gives you an edge in forecasting earnings.
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
One of the most important drivers of stock price appreciation over time is earnings growth. While revenue expansion often gets the spotlight, investors should not overlook another equally powerful lever: cost optimization.
Companies that can grow revenue while actively managing costs tend to see stronger margin expansion — and ultimately, faster earnings growth.
What to Look For
A practical way to evaluate this is to go directly to the source:
Download recent earnings transcripts (last 2 quarters)
Review investor presentations, press releases, 10-Qs, and the latest 10-K & Proxy statements
Use tools like NotebookLM to systematically scan for insights
Then ask a simple but powerful prompt similar to this:
“Has the company outlined concrete plans to reduce costs or improve profitability in the coming periods?”
This includes:
- Cutting or exiting low-margin / non-core businesses
- Workforce restructuring (if done strategically)
- Improving operational efficiency (e.g., supply chain, automation)Example 1: ResMed
ResMed is a company that sells devices and software to treat sleep apnea (a condition where people stop breathing during sleep).
Recently, management has taken several steps to improve profitability:
Exiting lower-margin activities→ Shifting away from services like IT support and focusing more on higher-margin software
Workforce restructuring→ Adjusting headcount to align with long-term strategy
Improving operations→ Investing in automation and supply chain efficiency, already boosting margins
Key takeaway:ResMed isn’t cutting costs blindly — it is reallocating resources toward higher-return segments, which is a much healthier signal for long-term earnings growth.
Going One Step Further: Linking Cost Initiatives to Financial Statements
Identifying cost-cutting plans is only the first step. To make this insight truly actionable, investors should follow up with this prompt:
“Where will these cost savings show up on the income statement?”This helps you translate management commentary into more accurate earnings projections.
You can refine your analysis by asking:
Will savings reduce COGS (improving gross margins)?
Will they lower SG&A (improving operating margins)?
Or will they affect R&D (potentially impacting long-term innovation)?
Example: ResMed
From management’s initiatives, we can roughly map the impact:
COGS (10/10 likelihood of reduction)
→ Supply chain improvements, automation, and logistics optimization
→ Already driving meaningful gross margin expansion
SG&A (7/10 likelihood)
→ Workforce restructuring and exiting lower-margin services
→ However, part of the savings is reinvested into marketing and growth, so net impact is moderate
R&D (2/10 likelihood)
→ Unlikely to be cut
→ Management continues to prioritize innovation and reinvest consistently
Why This Matters for Investors
This simple breakdown gives you a clearer view of earnings quality and sustainability:
Cost savings in COGS → Typically more scalable and sustainable
Cost savings in SG&A → Helpful, but may be partially reinvested
Cuts in R&D → Often a red flag if it weakens future growth
More importantly, it allows you to:
Build better financial models
Estimate margin expansion more accurately
Avoid overestimating earnings when savings are reinvested
Read more about Resmed's stock analysis here.
Example 2: Meta
Meta provides another useful contrast.
Costs are expected to rise in the coming periods due to heavy AI-related capex (depreciation impact)
However, management is also:
Reducing losses in Reality Labs (non-core, loss-making segment)
Cutting workforce to improve efficiency
This shows a mix of investment for future growth + cost discipline.
Important Caveat: Not All Cost Cutting Is Good
Investors should be cautious.
When cost cutting becomes:
Too aggressive or poorly executed, ie when laying off staffs at a very high rate
Focused purely on short-term optics
…it can backfire by:
Hurting employee morale
Weakening company culture
Making it harder to attract and retain top talent
Over time, this can damage innovation and long-term competitiveness.
(For a deeper dive: “Why aggressive layoffs can signal potential trouble” — link in blog)
Final Insight
The best companies don’t just cut costs — they optimize intelligently.
Look for management teams that:
Cut low-return or non-core areas
Reinvest savings into high-growth opportunities
Maintain a balance between efficiency and long-term capability
That’s where sustainable earnings growth and long-term stock returns are often built.
Cost-Cutting Plans That Drive Earnings Growth
This is just one of the many checklists I use to analyse stocks and construct my portfolio.
If you’re interested in the full framework, 👉 click here to explore all my checklists
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