COGS, or the cost of goods sold, is the cost of creating or making the product. This includes both the inventory and the direct labor associated with taking the inventory from raw material to finished product. In general, COGS is used to determine the difference between business models, especially if they're in the same industry. One common way investors compare business models is with the COGS rate, which is COGS divided by sales.

Obtain the annual report. It is usually posted on the company's website, or you can contact its investor relations department to request a copy by mail. You can also request one from your stockbroker.

Turn to the income statement. This is a summary of company sales and expenses. The first line of the income statement is sales or revenues. The second line item is the cost of goods sold, or COGS. Assume the COGS is $10,000 and sales are $50,000.

Calculate the COGS rate. Divide COGS by sales. In this example, the rate is $10,000 divided by $50,000, or 20 percent.

Compare the COGS against other companies. In general, the lower the COGS rate, the better the business model. Unlike most other financial ratios, a COGS does not have to be compared against other companies in the same industry.

Tip

The COGS rate can vary significantly among businesses in the same industry.