Costco Case Analysis
How well is Costco performing from a financial perspective?
When Jim Sinegal founded Costco in 1983, the mission was to continually provide its members with quality goods and services at the lowest possible prices. In looking at the company’s performance in the fiscal years 2000-2006, the mission, to build a financially healthy company, has paid off well for those stockholders who invested in the membership warehouse idea. Our analysis looks at four areas to understand their financial performance, the first, their ability to secure loans from banks and how much of their assets are financed from debt, next, their ability to be able to liquate assets if needed, their inventory turnover in a years time period, and finally the sales and profit margins. What we found was that Costco is doing well financially in key areas, with one area of caution being their profititability, which is below their direct competitors, and industry averages. Beginning with the leverage ratios, how a company is financed is important in determining company performance and if it remains a sound investment. The Leverage Ratio “Debts to Assets” in 2006, indicates that Costco has been able to successfully maximize how much it receives in loans from banks and other sources.
The Debts to Assets ratio was 58.41% in 2006, meaning that over 58% of the company’s assets were financed by debt (both long and short term) versus equity. For reference, most companies in general finance about 40% of their assets with debt, however, because Costco has a substantial amount of real assets, including land and buildings, they are able to finance even more because there is a large amount of tangible collateral available. Costco has access to more money than similar businesses and is, therefore, in a better position to continue its growth.
How long it takes a company to turn inventory over is an indicator of financial stability. Costco’s strategy is to provide lower cost to their consumers by
When Jim Sinegal founded Costco in 1983, the mission was to continually provide its members with quality goods and services at the lowest possible prices. In looking at the company’s performance in the fiscal years 2000-2006, the mission, to build a financially healthy company, has paid off well for those stockholders who invested in the membership warehouse idea. Our analysis looks at four areas to understand their financial performance, the first, their ability to secure loans from banks and how much of their assets are financed from debt, next, their ability to be able to liquate assets if needed, their inventory turnover in a years time period, and finally the sales and profit margins. What we found was that Costco is doing well financially in key areas, with one area of caution being their profititability, which is below their direct competitors, and industry averages. Beginning with the leverage ratios, how a company is financed is important in determining company performance and if it remains a sound investment. The Leverage Ratio “Debts to Assets” in 2006, indicates that Costco has been able to successfully maximize how much it receives in loans from banks and other sources.
The Debts to Assets ratio was 58.41% in 2006, meaning that over 58% of the company’s assets were financed by debt (both long and short term) versus equity. For reference, most companies in general finance about 40% of their assets with debt, however, because Costco has a substantial amount of real assets, including land and buildings, they are able to finance even more because there is a large amount of tangible collateral available. Costco has access to more money than similar businesses and is, therefore, in a better position to continue its growth.
How long it takes a company to turn inventory over is an indicator of financial stability. Costco’s strategy is to provide lower cost to their consumers by