Costco Wholesale Case Study Essay example

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Stakeholders invest money with the intent to gain return in the future. It is important for stakeholders to gain access to information and evaluate the firm’s performance before they put money in it. On the other hand, it is the firm’s management team job to make decisions that would maximize the long term value of the firm’s common stock. The intent of this paper is to analyze Costco Wholesale Corporation’s financial performance and to assess how efficient the business has been over a five year period as well as to provide recommendation for financial management strategy. The problem identified in this paper is the low margins in the industry. Because margins are low, the profitability of individual companies depends on high…show more content…
The competitors’ higher current ratio might also be a sign for too much inventory that might have to be written-off or too many old accounts receivables that could turn into bad debts. Sears and Walmart’s account receivables are a way higher than Costco and BJs, confirming that there is no significant reason for considering Costco’s current ratio a weakness. Costco’s gross margin has been well maintained over the five year period. Their gross margin of 10.4% is much lower than Sears’ of 26.6% and Wal-Mart’s of 21.5%. Only BJ’s has a lower gross margin of 9.2%. Costco’s 2001 gross margin suggests ability to remain profitable and very competitive at the same time. The company has been able to provide goods to customers at a very low mark-up and at a lower per unit cost. According to the case study Costco’s management team has decided to reinvest net income back into the company instead of paying dividends. This decision has resulted in earnings retention ratio of 100% as shown on Torres’s sustainable growth model. Absence of dividends could lead to some investor dissatisfaction in the short term. The return on equity (ROE) also has been decreasing during the five year period. It has dropped from 18.6% in 1998 to 14.2% in 2001, which could also lead to investor dissatisfaction. ROE tells how well stockholders are doing in
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