Costco Case Study

Amazing Essays
To measure a firm’s health within its industry, there is also a need to analyze their short-term financing policies. By measuring these, one can determine what portion of the company’s sales cycle needs to be financed by cash. For obvious reasons, shorter cash cycles are more healthy for a company. To minimize cash cycle, there should be initiative on the corporate level to minimize inventory and receivables periods and maximize payable periods.

Short-term financing Ex-1
As seen in the table above (Short term financing Ex-1), Costco’s inventory period has grown over the past 5 years. This is coupled with a fluctuating receivables period that is also slightly growing. These two periods led to a growing Operating Cycle which, in general,
…show more content…
(2) The company can change their receivable policy. This is more difficult to do because it is already low. Additionally, the receivables that the company has are from two sources, vendor receivables for volume rebates/purchase discounts and reinsurance receivables from Costco’s insurance subsidiary (Costco’s 10-K filing). These two factors are harder to change, and simply adjusting credit terms or invoice policy will not do the job. (3) The last option rests in the company’s payable policy. From ‘15-’16, Costco’s payable period has dropped from 32 to 27 days. This results in 5 additional days that the company needs to finance using cash. The company must revert back to paying their payables during the 30-32 day mark, as they had from …show more content…
Kroger, in 2016, has introduced a new payables policy that extends their period 2 days longer than the 5 year average. With a payables period of 24.45 days, Kroger only needs to finance with cash for 6.62 days. Should they continue to better these cycles, it is possible to see a complete remission of the cash cycle.
Short-term financing Ex-4
From our examination of the previous three charts, we have made several conclusions: (1) Costco’s short term cycles and periods have slowly been getting less efficient over the past 5 years and have led to a cash cycle in 2016 that is more than double 2015’s. (2) Walmart had struggled in 2014 with its short term policies, but is now on track to being more efficient with short-term financing. (3) Kroger has experienced, since 2012, greatly fluctuating periods, but is now on track to have a great 2016 with its longest payable period and shortest cash

Related Documents

  • Decent Essays

    Viacom Growth Strategy

    • 761 Words
    • 4 Pages

    In 2011, this number had only been 7.34 billion, and the biggest jump took place in 2013, when it saw a 3 billion dollar upsurge. Both Viacom’s deferred taxes, credit and debit, decreased however. In 2015 their deferred taxes-credit was 223 million, a full 600 million less than it had been in 2011. Likewise, their deferred taxes-debit decreased more than 700 million, totaling just 45 million in 2015. Another decrease the balance sheet displays, is liabilities and shareholders equity.…

    • 761 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Dividend Ex-3 As seen above (Dividend Ex-3), this global retail industry has shrunk in dividends from 2012 to 2016 by 2.91%. Seeing as average inflation over these 5 years has been 1.29%, the industry is not keeping up with its dividend payments (or perhaps is switching to a different payout policy). While this is the case, Walmart seems to be the outlier with an average dividend growth rate of 6.55%. So, for an investor trying to find a stock with growing dividends, Walmart seems to be a viable option. The dividend policy of Kroger is fairly similar to Walmart.…

    • 1292 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Inventory Turnover Ratios

    • 738 Words
    • 3 Pages

    As most business rely on credit sales, a shorter settlement period is usually preferred, as a delay in receiving funds can place strain on an organisations abilities to meet its obligations. Effective management of accounts receivable minimises the risk of bad or doubtful debts. The efficiency calculations completed for GWA (Appendix *), show the average settlement period for accounts receivables was 73.5 days for the period. As illustrated below in Figure *, the settlement period was relatively stable at 73 days in 2011 to 71 days in 2012 and 2013, however, this figure peaked at 79 days in 2014. In 2014, GWA Group Limited had “three major customers which comprised 44% of the trade receivables” (GWA Group Limited, 2014, p. 74); therefore, one slow paying debtor could have contributed to the spike in settlement days.…

    • 738 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    Due care must be taken in this regard as the company has a slightly low liquidity and could potentially have issues with paying off debts in the future if the quality of Orica's management of inventory and receivables does not improve (despite an increase in sales by almost $500m). 1.2. Profitability…

    • 2157 Words
    • 9 Pages
    Decent Essays
  • Decent Essays

    The increase in the gross profit margin from 2013 to 2014 shows that our COGS are decreasing proportionally to our revenue meaning production is costing less. This could be a good sign of efficiency. Short-term Liquidity Ratios Suppliers and other short-term lenders often want to know whether or not a debtor can meet their debts. There are four ratios used to determine this (Heisinger & Hoyle, 2012). I calculated the current ratio and quick ratio for this assessment.…

    • 875 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Case Study Graincorp

    • 1472 Words
    • 6 Pages

    Our DCF valuation estimates the fair value between -$0.97 to -$4.64 per share with conservative input. With the company’s poor performance in the last 2 years, it is hard for the company to improve their performance in the near future. Even the return of capital for this company, based on the FY14 data, is lower than its WACC (8% < 8.78%). Meaning that Graincorp was destroying the firm value instead of adding more value into it. However, there might be a chance for this company to improve their performance through the support given by the government and their new investment on assets in the future.…

    • 1472 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Their stock price has been consistent but has lowered since 2016. The company can also say that they have been around for a long time, so are reliable and have a long track record. Weaknesses, I would say that the company is placed at a disadvantage because of the DSO, DSI, and their average accounts receivable ratio is low. They only collect its receivables 2.33 times a year. Opportunities, Ford has an opportunity of fixing all of these problems.…

    • 864 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    In fact, the rig system accounts for nearly 45% of its total revenue, as shown in the chart below. Therefore, it is not surprising why the company reported weak financial numbers for the third quarter, with its revenue declining almost 41% year-over-year. Source: National Oilwell Varco However, there are a number of positives about National Oilwell that investors should not ignore, as these positives are allowing the company to put up stronger bottom line performances than expected. Let’s take a look at the reasons why National Oilwell Varco’s massive drop this year is an opportunity that investors should consider. Gaining more business despite the downturn Though National Oilwell’s overall backlog has declined, it is seeing an improvement in net order additions this year, driven by new technologies.…

    • 854 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    4. Financial Analysis 4.1 Time Series Analysis 4.1.1 Profitability Analysis Mayne Pharma reported sale revenue of $141.4M in 2015 underlying EBITDA of $36.4m and reported NPAT of $7.8m. The performance of 2015 seems unsatisfactory as the net profit margin is only 7.83% compared to 2014 where the net profit margin is 21.49% .These results were down due to the underperformance of products sold via third party US distributors in the first half of 2015 but the company realized the problem and has subsequently taken full control of these products by bringing distribution in-house during the second half. However, there is a positive trend of increasing gross profit margin staring from 2011 from 50.85% which reaches 83.05% in 2015. The reported NPAT for the second half was down $0.2m to $3.8m as it was impacted by the one-off costs that have been excluded from the underlying result.…

    • 909 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Starbucks long-term return on assets (ROA) deteriorated from 2012 to 2013 from 17.76% to 0.08%, but improved remarkably in 2013 to 2014 from 0.08% to 18.57%. Over the last ten years, Starbucks Corporation had the highest return on assets of 18.57 % in 2014 and the lowest return on assets of 0.08% in 2013 with a median of 10.86%. Starbucks cost of financing (debt) was around 5% suggesting that the company has favorable financing by almost 14% in 2014. Starbucks return of assets was greater than 5% (cost of debt) with only one unfavorable year for financing in 2013 probably due to the impending lawsuit. By the end of 2013, Starbucks had total assets of $11,517 million and total liabilities of $7037 million produced a debt-to-asset ratio of…

    • 839 Words
    • 4 Pages
    Decent Essays