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Financial Analysis ProjectBy: Juliana De MeloACCT 2410March 19, 2017IntroductionCostco Wholesale Corporation is an American membership-only warehouse club that provides a wide selection of merchandise. Costco headquarter is located in Issaquah, Washington, United States. It is currently the largest membership-only warehouse club in the United States, and as of 2015, the second largest retailer in the world after Walmart. Costco Wholesale Corporation operates an international chain of membership warehouses, which carry quality, brand name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. The warehouses are designed to help small-to-medium-sized businesses reduce costs in purchasing for resale and for everyday business use. Individuals may also purchase for their personal needs. Categories on sale include groceries, candy, appliances, television and media, automotive supplies, tires, toys, hardware, sporting goods, jewelry, watches, cameras, books, housewares, apparel, health and beauty aids, tobacco, furniture, office supplies and office equipment. Costco is known for carrying top quality national and regional brands, with 100% satisfaction guaranteed, at prices consistently below traditional wholesale or retail outlets. Members can also shop for private label Kirkland Signature products, designed to be of equal or better quality than national brands.Financial AnalysisLiquidityLiquidity is the ability of current assets to meet current liabilities. In other words, liquidity evaluates the ability to pay current liabilities. In 2016, Costco closed the fiscal period year with a negative balance in working capital of 357 million. The ability to meet its short-term obligations with its current assets is negative.Current ratio: A business’s ability to pay current liabilities from current assets. The current ratio for Costco Warehouse is 0.98. The current ratio 0.98 indicates that Costco Warehouse is capable of paying off any obligation 0.98 times with current assets over current liabilities. The company is not in good financial health. This ratio shows a deficiency in the ability of paying for your obligations.Cash ratio: The company ability to pay current liabilities from cash and cash equivalents. The cash ratio for Costco Warehouse is 0.22. Cash ratio only looks at the most liquid short-term assets of the company, which are those that can be most easily used to pay off current obligations. It ignores inventory and receivables, as there are no assurances that these two accounts can be converted to cash in a timely matter to meet current liabilities. So, having a cash ratio below 1:1 is not necessarily a bad thing, but Costco has a way below cash ratio analysis than the industry average of 0.60. Quick ratio: The company ability to pay all its current liabilities if they came due immediately. The Quick ratio, or Acid-test ratio for Costco Warehouse is 0.38. The higher the ratio, the better. Quick ratio below 1:1 demonstrate financial distress and the difficult for the company to pay the current liabilities. The industry average quick ratio rate is 0.79. Costco is presenting a too low ratio for 2016.EfficiencyEfficiency evaluates the ability to sell merchandise inventory and collect receivables. The efficiency ratios, mainly focus on profits and assets, especially inventory and receivables.Inventory turnover: It’s the number of times a company sells its average level of merchandise inventory during a period of time. The inventory turnover for Costco Warehouse is 11.51, which means Costco takes 11.51 times to sold and replace inventory on hand. The industry average is 8.49.Days’ sales in inventory: is the average number of days that inventory is held by a company. Costco Warehouse holds his inventory for about 31.7 days, what is not a good ratio for this industry, showing lack of inventory management. The industry goal is to have a much quicker inventory sales.Gross profit percentage: is the profitability of each sales dollar above the cost of goods sold. The gross profit percentage for Cost Warehouse is 102.3%, which means that the company is 102.3% buying and selling products efficiently. High gross profit margin means that the company is in good financial health.SolvencySolvency evaluates the ability to pay long-term debt. The lower the solvency ratio, the greater profitability a company has to pay debt.Debt ratio: Measures the proportion of assets financed with debt. The debt ratio for Costco Warehouse is 0.63. A low percentage means that the company is less dependent on borrowing capital. The lower the percentage, the less leverage a company is using and the stronger its equity position. Costco Warehouse is in good condition in how much of its assets are financed by debt.Debt to equity ratio: Calculates the proportion of total liabilities relative to total equity. A debt to equity ratio of Costco Warehouse is 1.69. A low debt to equity ratio means the company has taken on relatively little debt and thus has low risk.Times-interest-earned ratio: Measures a business’s ability to pay interest expense. Times-interest-earned for Costco Warehouse is 28.02. It’s a good indicator that the ability to service debt is not a problem for a borrower, yet. The higher is the ratio, the better is for borrowers.ProfitabilityProfitability calculates and evaluates how profitable the company is. Measures the overall performance of a firm and its efficiency in managing assets, liabilities, and equity. Profit margin ratio: Indicates how much net income is earned on every dollar on net sales. The profit margin ratio for Costco Warehouse is 2%. Creditors and investors use this ratio to measure how effectively a company can convert sales into net income. Investors want to make sure profits are high enough to distribute dividends while creditors want to make sure the company has enough profits to pay back its loans. In other words, outside users want to know that the company is running efficiently. An extremely low profit margin formula would indicate the expenses are too high and the management needs to budget and cut expenses. Costco warehouse seems to have a very low ratio of profitability ratio.Assets turnover ratio: Calculates how efficiently a business uses its average total assets to generate sales. A ratio of 3.5 indicates that the company is generating 3.5 dollars of sale for every dollar invested in assets. It is a very low result. Costco warehouse shows not being in good financial health. The industry average is 16.6%Earnings per share: Calculates the amount of a company’s net income or loss for each share of its outstanding common stock. EPS ratio is useful for estimating the amount of room that a company has for increasing its existing dividend amount. Investor interested in a steady source of income would be satisfied with an EPS of 5.33.Investment PotentialValuation ratios are used to analyze the attractiveness of an investment in a company. The idea is that by using these ratios, investors can gain an understanding of how cheap or expensive a company's current stock price is, compared to several different measures. The more inexpensive a company is, the more attractive the investment in that company becomes. Price/earnings ratio: Calculates the value the stock market places on $1 of a company’s earnings. It is the best source of an investment evaluation. Price earnings ratio for Costco Warehouse is $30.97. Because the company is not operating as well as we expected it to over the long run, your return on investment could fail to meet your expectations, and you could lose money. Costco stock is expensive, especially considering that the company isn't growing all that fast. Revenue rose by just 2.12% in fiscal 2016, while EPS, adjusted for a one-time tax benefit, grew by 3.2%. This lofty valuation makes the stock risky for investors, no matter what effect e-commerce ultimately has on Costco's business. Costco stock looks like a risk not worth petitors Costco Wholesale main competitors in the highly competitive retail market of large membership retail stores include Sam’s Club (Wal-Mart), Bj’s Wholesale Club, and Meijer. Costco has been growing the fastest. It’s top line in the US growth at a compounded annual growth rate. Costco has also growing fast in store numbers and sales in the last five years, 90% of membership is renewal annually in U.S and 85% worldwide.The profitability of those wholesale membership companies depends on high volume sales, low-cost purchasing, and efficient distribution. Costco may dominate the market due to advantage in purchasing, distribution and finance for being a large company. We can notice on the graphics below the power of the Walmart and Sam’s club in the leadership of the retailer market. They have the flexibility to change prices and serve the demand, sharing its fixed costs over many products and be the cheapest place to shop. ConclusionCostco Warehouse is not in very good financial health, if compared with any other retailer and membership stores. The cash flow is seasonal, with a peak during the winter holidays. The inventory turnover is incredible high in comparison with other stores, even having receivables low rate because most customers pay with cash or third party credit cards. Due to low margin in merchandise sale, Costco Warehouse depends on membership fees to turn fluctuations in sales into profit. In today’s world of window shopping via smartphone and next-day delivery, Costco is not the first option for consumers to buy online, offering few products brand in each category, not giving options to customers. They also have to compete with many retailer, discounted, and online stores. Costco rely on direct manufacturer shipments and cross-docking facilities to reduce distribution and storage costs. They need to keep operating costs low, and sell more of theirs private-label products to be able to keep low prices and customer values. Because of the profit’s low margin there is no room for discounts and promotions marketing strategies. I would not invest at Costco Warehouse at this time. The company is not operating as well as I expected for me. If you observe the Income Statement itself, you can notice a sales growth of 2.12%, but the significant increase in costs and interest expenses result in a decrease in net income for 2016 of 1.14%. The change in customer habits and preference, the increase in competition, the high cost of its stocks, and the low financial ratio margin in comparison with the industry average lead me to take the decision of not investing in Costco Warehouse at this moment. Appendix AFinancial StatementsAppendix BRatios for Financial Analysis1 – LiquidityWorking CapitalCurrent Assets – Current Liabilities = 15,218 – 15,575 = (357)Current RatioTotal Current Assets/Total Current Liabilities = 15,218/15,575 = 0.98Cash RatioCash + Cash Equivalents/Total Current liabilities = 3,379/15,575 = 0.22Quick RatioCash + Short-term Investment + Net Current Receivables/Total Current Liabilities = 3,379 + 1,350 + 1,252/15,575 = 0.382 – Efficiency Inventory TurnoverCost of Goods Sold/Average Merchandise Inventory = 102,901/8,939 = 11.51Days’ sales in inventory365 days/Inventory Turnover = 365/11.51 = 31.71Gross Profit PercentageGross Profit/Net Sales Revenue = 118,719/116,073 = 102.3%Account Receivable Turnover RatioNet Credit Sales/Average Net Accounts Receivables = 118,719/1,238 = 95.9Days’ Sales in Receivables365 days/Account Receivable Turnover Ratio = 365/95.90 = 3.813 – SolvencyDebt RatioTotal Liabilities/Total Assets = 20,831/33,163 = 0.63Debt to Equity RatioTotal Liabilities/Total Equity = 20,831/12,332 = 1.69Times-Interest-Earned RatioNet Income + Income Tax Expense + Interest Expense/Interest Expense = 2,350 + 1,243 + 133/133 = 28.024 – Profitability Profit Margin RatioNet Income/Net Sales = 2,350/116,073 = 2.02%Rate of Return on Total AssetsNet Income + Interest Expense/Average Total Assets = 2,483/33,090 = 7.5%Asset Turnover RatioNet Sales/Average Total Assets = 116,073/33,090 = 3.5Rate of Return on Common Stockholders’ EquityNet Income – Preferred Dividends/Average Common Stockholders’ Equity = 2,350/11,348 = 20.7%Earnings per ShareNet Income – Preferred Dividends/Common Shares Outstanding = 2,350/437,952 = 5.335 – Investment PotentialPrice/Earnings RatioMarket Price per Share of Common Stock/Earnings per Share = 165/5.33 = 30.97Dividend Yield Annual Dividend per Share/Market Price per Share = 1.80/165 = 1.1%Dividend PayoutAnnual Dividend per Share/Earnings per Share = 1.80/5.33 = 0.34Appendix CMergent Intellect Ratio’sCostco Warehouse Corporation (COST)Works CitedFinancial Statement Analysis Definition | Investopedia. (n.d.). Retrieved March 10, 2017, from Costco - Wikipedia, the free encyclopedia. (n.d.). Retrieved March 10, 2017, from Costco. (n.d.). Retrieved March 10, 2017, from Costco Investors. (n.d.). Retrieved March 10, 2017, from "First Research Industry Profiles." First Research. N.p., n.d. Web. 14 Mar. 2017. ................
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