Costco Financial Analysis

The article evaluates the suitability of the company for investment by analyzing the performance of Costco, one of the notable international retailers. In order to make a choice, the evaluation considers both financial and strategic prospects. However, the purpose of this essay is to assess the corporation's five financial year reports, forecast future performance, and offer suggestions for costco retailer-appropriate financial management.
Costco Corporation is a multinational company that sells goods for reasonable costs. The shop is a part of a global network of distribution centers (Kimmel, 2013). The agency is set up so that it helps small and medium-sized businesses reduce their purchasing costs. In addition, the warehouse is ranked to be the most exclusive and largest organization with several product selections under one roof. Also, the company is recognized for selling top quality regional and national brands with 100 percent guaranteed satisfaction (Kimmel, 2013).

Ratio Analysis

The ratio analysis comprises of Costco Corporation and its main rival Wal-Mart company since they operate in same industry. The analysis involves three ratios under the main categories of liquidity, profitability, and efficiency ratios.

Company

Ratio

2012

2013

2014

2015

2016

Remarks

LIQUIDITY RATIOS

5- Year Trend

Costco

Current ratio

1.10

1.19

1.22

1.05

0.98

Costco current ratio is higher than Wal-Mart across the years.Thus,indicating its more liquid than its competitor Wal-Mart.

Wal-Mart

Current ratio

0.88

0.83

0.88

0.97

0.93

Costco

Quick ratio

0.48

0.55

0.59

0.46

0.38

Costco quick ratio is higher than Wal-Mart across the years.Thus,indicating its more liquid than its competitor Wal-Mart.

Wall – Mart

Quick ratio

0.20

0.20

0.20

0.24

0.22

Costco

Debt / Equity

0.11

0.46

0.41

0.46

0.34

Wal-Mart has higher debt/equity ratio than Costco affirming it’s less liquid than its competitor.

Wal-Mart

Debt / Equity

0.66

0.54

0.58

0.54

0.55

PROFITABILITY RATIOS

5 -Year Trend

Costco

Gross margin

12.42

12.59

12.6

13.0

13.3

Costco is less profitable than its rival since the gross margin across the years is below that of Wal-Mart

Wal-Mart

Gross margin

24.98

24.83

24.82

24.83

25.13

Costco

Return on Asset ( ROA)

6.34

7.10

6.50

7.15

7.06

The return on assets of both organizations increased the years although Wal-Mart’s ROA is higher than that of Costco.

Wal-Mart

Return on Asset ( ROA )

8.39

8.57

7.86

8.01

7.29





Costco





Return on Equity ( ROE)





14.03





17.58





17.79





20.74





20.71

Wal-Mart has higher ROE across the years than Costco .This shows Wal-Mart has promising returns and is best for investment.

Wal-Mart

Return on Equity ( ROE)

22.45

23.02

21.00

20.76

18.15

EFFECIENCY RATIOS

5 -Year Trend

Costco

Assets turnover

3.68

3.66

3.56

3.50

3.56

Costco is more efficient than Wall –Mart in selling its assets.

Wal-Mart

Assets turnover

2.39

2.37

2.34

2.38

2.39

Costco

Inventory turnover

12.64

12.27

12.04

11.64

11.57

According to the ratios across the years we can allude that Costco makes higher revenues than Wal-Mart

Wal-Mart

Inventory turnover

8.70

8.34

8.08

8.11

8.06

Costco

Receivable turnover

99.59

94.44

95.90

97.98

95.90

Costco is more efficient in collecting its debts then Wal-Mart due to its high turnover ratios across the years.

Wal-Mart

Receivable turnover

81.07

73.85

70.85

72.19

77.75

Morningstar (2017)

Financial Performance of Costco Corporation

Costco posted positive financial results for the period of five years between 2012 and 2016. The profit and revenue rate of growth was above that of its competitor, Wall -Mart. Notably, Costco has healthy financial statements thus no indicators of financial crisis. Therefore, the company is recommendable for neutral investors due to nominal returns.

Costco Corporation’s Stock

Costco stock is traded at NASDAQ market. The price of the stock increased steadily from 2012 to 2016. The value of stock experienced minimum instances of price decline during the five year period. However, the trend was maintained despite falling down of price in some months. Thus, there was negligible volatility hence indicating that there are no losses experienced by the stockholders in the company. The current stock price is valued at $11.66. The EPS is $4.66 while PE is 29.8 times. Company’s payout and the yield on divided is 29 and 1 percent respectively (Prior, 2013).



An Opinion of Whether Or Not the Firm Is Trying To Maximize the Wealth

The concept of maximizing shareholders wealth in companies is considered to be an elegant and powerful idea. Costco’s global growth of the business has been increasing significantly than its rate of growth in the United States. The ratio analysis across five years shows that the company increases its revenues by approximately 15 percent yearly (Prior, 2013). Considerably, the yearly growth rate of the Costco organization is at 5 percent. Evidently, the revenues have significantly increased from 18 percent in 2012 to 22 percent in 2016 (Prior, 2013). Also, it’s expected that the revenues will increase to 30 percent by 2018. Costco‘s has excellent performance is global markets because of the cost-saving initiative. The agency performs well in the US due to the absence of competition. Costco has established five stores for the span of five years between 2012 and 2016. The retailers also plan to open 16 more stores by end of financial years 2018 (Prior, 2013). The expansion of operations by Costco is a strategy of increasing their revenues thus maximizing their wealth.

Costco’s Ability to Raise Capital

Costco is among the largest stores in the United States comprising of more than 400 branches across the nation. Moreover, the organization has operations in Canada, United Kingdom, Japan, and Australia. The company ploughs more than 50 percent in sales revenues from the US hence making it be the most significant segment of the agency, followed by the profits from its operations in global stores (Prior,2013). The retailer generated approximately $90b in return in 2013 higher than that of its closest competitor Wall – Mart (Prior, 2013). However, Costco profits are relatively low because it sells its merchandise at discount price. The corporation increases revenues through membership subscription fee. Business members pay a subscription of $55 while nonexecutive members are charged $110 (Prior, 2013). All these are strategies aiming at increasing their capital base. The retailer also runs clubs that generate additional revenues to the company. Costco provides several merchandises to their customers such as hardlines, softlines, ancillary services, and groceries. These goods contribute to more than half of the revenues.

Appraisal of Outstanding Bond Issue of Costco Corporation

Costco Corporation, as at, August 2017, had an outstanding debt amounting to $ 6573 mil. The company’s long-term debt to assets ratio in the third quarter of the 2017 financial years is 0.18. This is higher compared to last financial period which was reported at 0.12 (Morningstar, 2017). The decline in debt ratio signifies that the organization is moving towards financial independence using debt financing.

The Recommendations for Improving the Costco’s Financial Position

The company should hire more professionals. This will allow Costco Corporation to increase their scale of business. The acquired staff should focus their energies on money making activities. Also, increasing the number of personnel in the company sound counterintuitive. Additionally, a large workforce in an organization reduces the chances of heavy workload on one staff. Thus, this increases efficiency and effectiveness.

The management of the Costco Company should improve the tier of customer service. In this modern world, digital platforms such as social media are used by the organization to give clients a chance to suggest the ways in which they wish to be served and treated. Accordingly, the success of the business depends on the customer service. Notably, standard customer service can increase verbal advertisement, boost the customer expenditure, and raise the customer interaction’s frequency.

Costco Corporation should benchmark their business and reduce the costs. Appraising business performance against rivals gives a chance to understanding valuable information about the financial potential position the company. For example, you may establish that competitors are spending less in production inputs of similar products that you are spending more. Benchmarking helps in gaining ideas of cutting down costs and maximizes profits.

An Overall Summary of the Firm’s Financial Condition

In summary, the financial analysis indicates that Costco’s stock prices are favorable. The organization experiences increased rivalry and squeezing profits from its closest rival for the last five years. Nevertheless, these setbacks can be handled by implementing effective plans and proper financial management. The ratio analysis reveals the company is effective in the management of assets and inventories. Also, across the five years, the share price progressively increased. Precisely, the Costco’s financial health is positive and there is no alarm of business shutdown in future. The company must continue to open its outlets in international nations to expand its market share. Therefore, I recommend investors to inject their money into the shares of this corporation.









References

Kimmel, W. (2013). Financial Accounting. Hoboken: Print Internet Sources Morningstar. Costco Wholesale Corporation. Retrieved from http://quotes.morningstar.com/stock/s?t=COST®ion=USA&culture=en-US.

Morningstar. (2017). Target Growth, Profitability and Financial Ratios. Stone, Brad. Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World. Retrieved from

Prior, A. (2013). WSJ Online. Costco Shines Amid Otherwise Lackluster Same-Store Results. Retrieved from