Summarize this case
Margarita Torres invested in the Costco Wholesale Corporation back in the year 1997. She was quite satisfied with the performance of the company between 1997 and 2002. As the time passes, she became more curious in knowing the reason of company’s fine growth from the perspective of additional warehouses and sales revenue. In the year 2002 she decided to upgrade her investment portfolio by analyzing that weather the company is operating in an efficient manner or not. She conducted some financial calculations based on rational analysis, common size statement analysis and by means of a sustainable growth model. She also compared the performance of the Costco with its three biggest rivals for better analysis. This case completely highlights the financial facts and figure related to the performance of Costco for detailed examination.
Why did Torres evaluate her investments using two methods: Ratio analysis and Cash Flow Analysis? What did these two methods tell her?
The corereason for conducting the ratio analysis was that it actually helped Torresin comparing several line stuffspresent in financial statements to observethat how they vary and fluctuate over time or in what manner they can be compared to similar companies. Asfar as the cash flow is concerned, it simply helped Torres in analyzing the operating, investing and financing activities of the company through which the cash is generated. Additionally, this analysis helped her in understanding the cash flow requirements to meet the funding for the business (Bodie, 2004). These two methods restricted Torres from further investment because of low ROI, ROE and increased operating expenses.
What did you learn from the Analysis performed? Include the common sizefinancial statements, sustainable growth model and the benchmark results in your Analysis.
From exhibit 1 which relates to common size financial statements it can analyze that their operating expenses in the year 2001 are 99.03%, which is an all-time high figure as compared to the results of last three years. In the year 1999 there operating expense were high as 99.11%, but after that reduced it to best figure of 98.44%by the year 2000.This fall in operating expense ended in the year and raised the figure to 99.03%. In the year 2001 company’s operating income was 2.91%, whichwas fourth best in the five year performance. Moreover, in the year 2001 the total profit was 1.76% of the total revenue, which is lower as compared to the profit of pervious year which was around 2% of the total revenue (Weygandt, 1996). From the exhibit 2 of sustainable growth model it can be seen that the ROE of the year 2001 was 14.2%, which is quite low as compared to the last three year's statistics. Similarly from the ROA and asset turnover ratios were also at, the all-time, low which is reflecting the poor performance of the company as compared to the performance of the last three years. From exhibit 3 it can be seen that the net margin of the Costco is 1.73%, which is third best among the four rivals (Weygandt, 1996). Wal-Mart ranked first and sears ranked second, having net margins of 3.26% and 1.79% respectively. Moreover the current ratios of the Sears, Wal-Mart and BJ’s are 2.32, 2.70 and 1.20 respectively, which sounds relatively optimistic as compared to the Costco’s 0.94 which might create liquidity issues later on. On the other hand the inventory turnover of the Costco is far better than the rivals. Costco’s inventory turnover was 11.7 times a year, which is relatively good as compare to its competitors who are lying somewhere between 5-9 times (Williams, 2008). As per my analysis Costco in the year 2001 started facing some issues which need to be brought into consideration...............
Costco Wholesale Corporation Financial Statement Analysis Case Solution
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Financial statements, ratio analysis with high growth retail company. Individual shareholder in Costco Wholesale Corporation is trying to assess the performance of the business it has invested in the past five years. It seeks to answer two questions: Does Costco has become more or less effective for that period of time? And it funded its growth? It organizes its analysis into three parts: the total amount of financial reporting, modeling, sustainable growth, and a comparative analysis of the ratio particular retailers. Provides information about events in the mass merchandising in the United States, with an emphasis on retail discounter in the last 40 years. Performance Costco, arranged in a historical context provides the relative reference to do a comparative evaluation between Costco and other industry participants. "Hide
by Maureen McNichols, Brian Tayan Source: Stanford Graduate School of Business 26 pages. Publication Date: 19 June 2003. Prod. #: A186A-PDF-ENG
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