Operating Expenses (OpEx)

Costs by nature and by function

IFRS allows two ways to present operating expenses, and the choice decides what an investor can see:

• By nature: costs are grouped by what they are. Typical lines are materials and services, employee benefit expenses, other operating expenses, and depreciation, amortisation and impairment. Many Finnish companies, such as Elisa, KONE and UPM, use this format. It shows directly how large the payroll is, but not the cost of the products sold.
• By function: costs are grouped by what they are for. Typical lines are cost of sales, selling expenses, administrative expenses and research and development expenses. Swedish and Danish companies and technology companies, such as Ericsson, Nokia and Novo Nordisk, usually use this format. It shows gross profit, but salaries and depreciation are spread across the lines.

From 2027, IFRS 18 requires companies that present costs by function to also disclose, in a note, the total amounts of depreciation, amortisation, employee benefits, impairments and inventory write-downs. This makes the two formats easier to compare.

How to read operating expenses

• Costs as a share of revenue. The opposite of the operating margin: if costs are 88% of revenue, the operating margin is 12%. The table on this page shows it for each company we track.
• Fixed and variable costs. Materials usually move with sales, while salaries, rents and depreciation are largely fixed in the short run. A company with high fixed costs sees its profit rise fast when sales grow and fall fast when they shrink; see operating leverage.
• Personnel costs. In service, software and consulting businesses, employee costs are the largest item. Their share of revenue and the change in headcount explain most of the margin.
• R&D and marketing. These are costs today but investments in future revenue. A company that cuts them can improve its margin for a while at the expense of growth.
• Other operating income. Gains on selling assets, government grants and rental income can reduce net costs in a single quarter; check whether the margin improved because of costs or because of one-off income.

Operating expenses vs. capital expenditure

Not all spending is an operating expense. Money spent on assets that will be used for more than a year, such as machines, buildings or developed software, is capital expenditure. It is booked as an asset in the balance sheet and reaches the income statement gradually as depreciation.

The line between the two involves judgement. Development costs, for example, must be capitalised under IAS 38 once certain conditions are met, while research costs are always expensed. A company that capitalises more of its spending reports lower operating expenses and higher profit today, and higher depreciation later. When comparing companies, look at the cash flow statement to see total spending including capital expenditure.

Leases changed in 2019: under IFRS 16, most lease payments are no longer operating expenses but depreciation and interest, which lowered reported operating expenses at every company with large leases.

Operating costs in the companies we track

The table below shows each company’s operating costs, calculated as revenue minus operating profit, for the latest quarter, and the share of employee costs for companies that report costs by nature. Compare the cost ratio with the same company’s earlier quarters, which you can find on its company page, rather than with other industries.