Costco Case Analysis

929 WordsNov 1, 20084 Pages
How well is Costco performing from a financial perspective? When Jim Sinegal founded Costco in 1983, the mission was to continually provide its members with quality goods and services at the lowest possible prices. In looking at the company’s performance in the fiscal years 2000-2006, the mission, to build a financially healthy company, has paid off well for those stockholders who invested in the membership warehouse idea. Our analysis looks at four areas to understand their financial performance, the first, their ability to secure loans from banks and how much of their assets are financed from debt, next, their ability to be able to liquate assets if needed, their inventory turnover in a years time period, and finally the sales and…show more content…
This large capital decrease could be considered a red flag to outside investors since it may suggest that sales are decreasing resulting in smaller accounts receivable. This decrease however can be attributed to Costco’s expansions that took place between 2005 and 2006. So although Costco continues to expand its scope each year it still remains financially liquid, a good sign they are financially stable. One of the negative variables that stand out is Costco’s profitability valuation. Costco is performing pretty poorly when analyzing these ratios in comparison to industry. The company’s profit margins – gross, operating, and net are substantially below the retail industry and the S&P 500. Costco’s net profit margin (or net return on sales) was 1.83% for 2006, while the industry averaged roughly 7%. Also Costco’s return on stockholders’ equity (ROE) appears to be sluggish as well. In 2006 Costco’s ROE was 12.06%. While it states in the book that a return of 12-15% is average for a company, what it fails to show is that this percent of just over 12 is roughly half of the industry average in 2006. Ratio 2006 2005 Liquidity Ratios Current Ratio 1.05x 1.22x Quick Ratio 0.47x 0.62x Working Capital 413,000.00 1,477,000.00 Activity Ratios Days of Inventory 28.50 28.48 Inventory Turnover 12.81 12.82 Leverage Ratios Debts to Assets ratio 53.72% 58.41% Debt to Equity 0.03x 0.09x LTD to Equity 2.35%

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