Financial Evaluation Paper on Costco Wholesale Corporation

Sales Growth

The sales growth of Costco Wholesale Corporation is 7.14% which is a positive figure. The figure shows that over a period of one year, sales have increased by 7.14%. This growth is significant as it indicates the business is not stagnating or decreasing in sales and thus it can compete with its competitors. An increase in sales could be used as an indicator to show that Costco Wholesale Corporation has increased its revenue over the period and that profitability is expected to grow. The positive growth in sales is a cause of optimism from all the stakeholders since the business is a going concern.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Margins

Costco Wholesale Corporation has two margins, i.e. gross margin and operating margin. Gross margin is calculated to show the percentage of the total sales revenue retained by a company after all the direct costs involved in the production of goods and services. The gross margins of Costco Wholesale Corporation are 10.62% in 2013 and 10.50% in 2014. The company can use the gross margins to measure the relationship between the production costs and the revenue the corporation gets. The gross margin is falling which could be an indication that the direct cost involved in the production has increased over the two years. The corporation can remedy the decrease in gross margin by cutting the labor costs, seeking materials at a lower cost or by increasing the prices to boost revenue. The gross margin is also used to forecast on the amount of money that is left for other operating expenses (Brentani, 2004, 155). The two margins also show that the corporation is efficient in its operations.

Operating margins is used to measure profit after paying the variable cost of production and before paying both interest and tax. The operating margin shows the portion of revenue that is used to cover non-operating costs such as interest and tax. For Costco Wholesale Corporation the operating margins are 2.97% in 2013 and 2.90% in 2014. The variance between the two margins is not high which indicate that the corporation is not at risk. We can conclude that the operating margin of Costco Wholesale Corporation shows that the corporation is efficient in its operation.

Profitability

Profitability ratios are used to assess the ability of a business to generate earnings compared to its expenses. In most of this ration, having a higher ratio compared to the previous period or a competitor is an indicator that the company is doing well. For Costco Wholesale Corporation, we have three profitability ratios, i.e. return on assets, return on equity and return on return on sales. The return on sales is used to evaluate the operational efficiency. The ROS has decreased between 2013 and 2014 which shows that the corporation is falling in it efficiency though the margin is minimal. ROS can be used to conduct trend analyses and as a result, analyze the efficiency performance over time.

Return on assets (ROA) measures profitability concerning a company's total assets. The ROA for Costco Wholesale Corporation is 12.87% in 2013 and 11.70% in 2014. This is a high return, and it is an indicator that the corporation is effective in converting the invested money into income. The higher the ROA, then the more efficient is a company because it is earning money on less investment. However, the ROA in 2013 is higher than the ROA in 2014 which shows that efficiency in 2014 decreased and that in 2014 the corporation invested more to earn money.

Return on equity (ROE) is the profitability concerning the shareholders' equity. It measures the profit to the investment by shareholders. The ROE in 2013 was 18.82%, and then it decreased in 2014 to 16.73%. First, the two ratios show that the corporation is profitable and shareholders can get a return from the investment. Secondly, the decrease in ROE over the two years is an indication of a decline in profitability and a reduction in the shareholders' equity.

The profitability ratios are all positive, which is a clear indication that the corporation is making a profit. However, between 2013 and 2014, all the three profitability ratios have decreased which is an alarming trend as it shows that the profitability declined. Thus, along the two years, the corporation is weak due to the decrease in profitability ratios. However, it is worth noting that even though the ratios have decreased, the corporation is still making a significant profit and thus it is a going concern.

Liquidity

Liquidity ratios are used to measure the debtor's ability to pay off the current debts to suppliers without the need of raising external capital. It also measures the margin of safety of a company when it pays debts. When the liquidity ratio is high, then it shows that a company is more liquid and its coverage of outstanding debts is good.

The current ratio is a liquidity ratio that measures the ability of a company to pay its short-term and long-term liabilities. It is also referred to as the working capital ratio. For Costco Wholesale Corporation the current ratio is 2013 is 1.19, and in 2014 it is 1.22. In both scenarios, since the ratio is higher than one then the company's assets are more than the liabilities, then the company is in a position to meet its liability obligation. The two ratios are less than three which is also an indication that the corporation is using its financing assets optimally.

Quick ratio measures the ability of a company to meet the obligations of its short-term liability using its most liquid assets. Only those assets that can be easily and quickly liquidated are factored into this ratio. Costco's quick ratios were 0.599 in 2013 and 0.63 in 2014. A high quick ratio greater than one is interpreted to mean that the company is in a better liquid position. When the ratio is less than 1, like in the case of Costco Wholesale Corporation, then it can mean that the company is heavily relying on its inventory and other assets to meet its short-term obligations. However, the facts that the quick ratio is less than 1does not mean the corporation is going to default it's short-term, or it's going to bankruptcy.

From this analysis, the corporation is in a strong position when it comes to the current ratio but it has a weakness with the quick ratio. One way to strengthen the quick ratio is by reducing the credit period so that its inventory can be included in the quick ratio.

Leverage Ratios

Leverage ratio checks on how capital is obtained in the form of debt. Total debt to total assets ratio measures the amount of total debt relative to the company's assets. When the ratio is high, the degree of leverage is also high and thus a financial risk. Costco's leverage total debt to total asset ratio in 2013 was 63.64% and 62.10% the following year. Since the ratio is less than 1, then the corporation has more assets than liabilities, and thus most of its assets are funded by equity.

Debt/ Equity ratio shows the amount a company is using to finance its assets to the shareholders' equity. Costco's debt to equity ratios is 177.89% in 2013 and 166.70% in2014. This is a very high ratio which is very risky as the company is aggressively financing its growth with debt. However, the earning is increasing so this is not harmful to the corporation.

The strength in the leverage ratios is the total debt to total assets ratio. However, a weakness appears because of the debt to equity ratio since the ratio is too high. Measures need to be taken in place to mitigate the liability that is used to finance growth, and if possible, the debt financing should be reduced.

Activity Ratios

Activity ratios measure a company's ability to convert the various accounts in the balance sheet to cash or sales. They are used to measure the organization operational efficiency and also profitability.

Asset turnover ratio measures the value of a company's sales or revenues generated relative to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its a...