Ratios Powered By Clearbit Costco Wholesale Corp ✓ Solved
ratios Powered by Clearbit Costco Wholesale Corp (NMS: COST)
Analyze the profitability, liquidity, debt management, efficiency, and market value ratios of Costco Wholesale Corp (NMS: COST) as per the financial data provided for the year-ending reported date. Discuss each ratio category and what the ratios imply about the financial health and operational efficiency of the company.
Paper For Above Instructions
Costco Wholesale Corporation is a leading retailer renowned for its low prices and membership-based sales. This essay will analyze various financial ratios of Costco, specifically focusing on profitability, liquidity, debt management, efficiency, and market value ratios, using the financial data as of year-end 2016.
Profitability Ratios
Profitability ratios are crucial for assessing a company's ability to generate earnings relative to its revenue, assets, and equity. For Costco, the return on assets (ROA) was reported at 7.08%, and the return on equity (ROE) stood at a commendable 23.77%. These figures indicate that Costco is effective in using its assets and equity to produce profit.
The return on investment (ROI) indicated an impressive 22.66%, signaling that the company has substantial returns on its operational investments. The EBITDA margin stood at 4.17%, suggesting that Costco manages its core operating profitability effectively amidst a low-margin retail environment. Additionally, the calculated tax rate of 24.35% reflects the company’s tax efficiency, which is a positive indicator for investors.
Liquidity Ratios
Liquidity ratios measure a company's ability to meet its short-term obligations. Costco's quick ratio was recorded at 0.38, which appears low and indicates potential liquidity issues if immediate obligations were to be called. However, the current ratio at 1.98 suggests that Costco has almost twice its short-term liabilities covered by its short-term assets, indicating better short-term financial health.
The net current assets as a percentage of total assets were at 5.08%. This relatively small percentage implies that a large portion of Costco's assets is not liquid, which warrants attention, especially if rapid cash conversion is required for ongoing operations or expansion efforts.
Debt Management Ratios
Debt management ratios provide insights into how a company handles its financial leverage. Costco has a long-term debt to equity ratio of 0.34 and a total debt to equity ratio of 0.43. These figures are commendable, highlighting that Costco maintains a conservative approach to debt financing, bearing a lower risk of financial distress compared to companies with higher leverage ratios.
Furthermore, an interest coverage ratio of 72.33 indicates that Costco is well-positioned to cover its interest expenses, which is a strong indicator of its ability to service debt sustainably. This high figure provides confidence to investors regarding Costco's robustness and operational stability.
Efficiency Ratios
Efficiency ratios measure how effectively a company utilizes its assets. Costco’s total asset turnover ratio was 3.57, suggesting that the company generates significant sales per dollar of assets, indicating efficient asset management. The receivables turnover ratio, impressive at 108.16, shows Costco's prowess in collecting its receivables efficiently.
Similarly, the inventory turnover ratio of 12.51 signifies that Costco efficiently sells and replaces its inventory, which is critical in a retail environment where margins are thin, and rapid inventory turnover can significantly boost profitability. The accounts payable turnover recorded at 12.32 indicates sound management of payments to suppliers, ensuring good relationships while maintaining sufficient cash flow. The accrued expenses turnover at 35.52 further supports this effective cash management strategy.
Market Value Ratios
Market value ratios offer insights into how the market perceives the company. The cash flow per share and book value per share stood at 20.53 and 41.61 respectively. These figures are essential for investors evaluating the intrinsic worth of Costco relative to its market capitalization. A high book value per share compared to market price may indicate that the stock is undervalued, presenting potential investment opportunities.
In summary, Costco Wholesale Corp’s financial ratios reveal strong profitability and efficient management of resources, albeit with some liquidity concerns. However, the conservative debt management practices and strong market performance signify that Costco is well-positioned for sustained growth. Investors and stakeholders should consider these ratios comprehensively in their evaluation and forecasting of the company’s future prospects.
References
- Investopedia. (n.d.). Profitability Ratios. Retrieved from https://www.investopedia.com/terms/p/profitabilityratios.asp
- Corporate Finance Institute. (n.d.). Liquidity Ratios: What They Are and How to Use Them. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/liquidity-ratios/
- Morningstar. (n.d.). Debt Ratios. Retrieved from https://www.morningstar.com/articles/1001650/understanding-debt-ratios
- Investopedia. (n.d.). Efficiency Ratios: Definitions and Key Terms. Retrieved from https://www.investopedia.com/terms/e/efficiencyratios.asp
- MarketLine. (2017). Costco Wholesale Corp Company Profile. Retrieved from https://advantage.marketline.com/analysis/overview/20054/
- SEC. (2017). Form 10-K. Retrieved from https://www.sec.gov/edgar/searchedgar/companysearch.html
- Yahoo Finance. (2017). Costco Wholesale Corp Financials. Retrieved from https://finance.yahoo.com/quote/COST/financials?p=COST
- Seeking Alpha. (2017). Costco: Growth On Every Aisle. Retrieved from https://seekingalpha.com/article/4121235-costco-growth-on-every-aisle
- Reuters. (2017). Costco Wholesale Corp Company Overview. Retrieved from https://www.reuters.com/companies/COST.O
- Zacks Investment Research. (2017). Zacks Rank and Rating. Retrieved from https://www.zacks.com/stock/quote/COST