1. Introduction
1.1 Background on Financial Ratio Analysis
Lenders and investors alike often use financial ratio analysis when determining the performance, solvency, and general business practice of a firm. Ratio analysis can serve as a tool to understand the relationship between quantities, and can be a useful benchmark in the comparison of two or more organizations within a common industry (Faello, 2015). The use of these ratios can determine factors such as asset and debt management, as well as calculating return on equity. By using public source documents, such as a firm’s income statement and balance sheet, a perceptive individual should be able to decipher the data into an organized format, which could reveal major indicators on the …show more content…
According to Forbes Magazine, emerging competitors, such as amazon.com, take advantage of the ease associated with shopping at home, while Sam’s Club uses the expansive influence of Wal-Mart to balance Costco’s exemplary membership expansion, which grows at a rate of about 10% per year (Trefis Team, 2014). With these factors taken into consideration, it is becoming increasingly relevant for investors and lenders to pay close attention to Costco’s past performance, as well as future planning and operations. One starting point is to focus on some of Costco’s major strengths of member loyalty resulting in increased revenue, Return on Equity (ROE), and stock ratios are in stark contrast to their major weaknesses of maintaining relevance in an increasingly competitive market, geographic limitations, and sharp rise in current …show more content…
On the reported sales front, according to Zacks (2016), there was a 3% increase in net sales to $10.71 billion for the five-week period ended April 3, 2016. Costco reported their 31-week period net sales of $68.96 billion, marking a 2% increase from $67.59 billion generated in the year-ago period (Zacks, 2016). Equally, examining Costco’s Return on Equity, the company has created a consistent return with its stockholder’s capital. Costco 10-year average ROE is 14.56%, but the most recent fiscal years of 2013, 2014 and 2015 have been 17.58%, 17.70%, and 20.74% respectively. As a result, Costco has experienced remarkable growth over the past 10 years from $60 billion in 2006 to $116 billion in 2015 (Strider, 2015). Sam’s Club does not offer any of these benefits to its employees. As a result, one finds they do not do as well as Costco and the future is not as bright, per the attached Ratio Analysis showing the financial strengths and weaknesses of each company.
In the stock world, Costco is still clearly a better overall investment. According to Daniel Sparks, in a Trailing twelve-month revenue growth (YOY), Costco shows a 1.4% increase compared to Wal-Mart with a negative (0.5%). The Price Earnings ratio is trading for Costco at 28.7 and Wal-Mart is at only 15.7. (Sparks, 2015). This is visible by comparing the compound average annualized growth rate of earnings
1.1 Background on Financial Ratio Analysis
Lenders and investors alike often use financial ratio analysis when determining the performance, solvency, and general business practice of a firm. Ratio analysis can serve as a tool to understand the relationship between quantities, and can be a useful benchmark in the comparison of two or more organizations within a common industry (Faello, 2015). The use of these ratios can determine factors such as asset and debt management, as well as calculating return on equity. By using public source documents, such as a firm’s income statement and balance sheet, a perceptive individual should be able to decipher the data into an organized format, which could reveal major indicators on the …show more content…
According to Forbes Magazine, emerging competitors, such as amazon.com, take advantage of the ease associated with shopping at home, while Sam’s Club uses the expansive influence of Wal-Mart to balance Costco’s exemplary membership expansion, which grows at a rate of about 10% per year (Trefis Team, 2014). With these factors taken into consideration, it is becoming increasingly relevant for investors and lenders to pay close attention to Costco’s past performance, as well as future planning and operations. One starting point is to focus on some of Costco’s major strengths of member loyalty resulting in increased revenue, Return on Equity (ROE), and stock ratios are in stark contrast to their major weaknesses of maintaining relevance in an increasingly competitive market, geographic limitations, and sharp rise in current …show more content…
On the reported sales front, according to Zacks (2016), there was a 3% increase in net sales to $10.71 billion for the five-week period ended April 3, 2016. Costco reported their 31-week period net sales of $68.96 billion, marking a 2% increase from $67.59 billion generated in the year-ago period (Zacks, 2016). Equally, examining Costco’s Return on Equity, the company has created a consistent return with its stockholder’s capital. Costco 10-year average ROE is 14.56%, but the most recent fiscal years of 2013, 2014 and 2015 have been 17.58%, 17.70%, and 20.74% respectively. As a result, Costco has experienced remarkable growth over the past 10 years from $60 billion in 2006 to $116 billion in 2015 (Strider, 2015). Sam’s Club does not offer any of these benefits to its employees. As a result, one finds they do not do as well as Costco and the future is not as bright, per the attached Ratio Analysis showing the financial strengths and weaknesses of each company.
In the stock world, Costco is still clearly a better overall investment. According to Daniel Sparks, in a Trailing twelve-month revenue growth (YOY), Costco shows a 1.4% increase compared to Wal-Mart with a negative (0.5%). The Price Earnings ratio is trading for Costco at 28.7 and Wal-Mart is at only 15.7. (Sparks, 2015). This is visible by comparing the compound average annualized growth rate of earnings