Andi Firmanata

af2975@nyu.edu
Homework 2: Costco Financial Statement Analysis

1. Please summarize the case!

The case is basically shows some key financial performance of Costco as a wholesaler. Indeed
Costco has the main competitors in the market which is SAMs (part of Walmart), BJ wholesaler and
SEARS. Margarita Torres, as one of shareholder, is trying to analyze key performance through two
methods: ratio analysis and Cash flow Analysis. There are some financial performance that Torres
is trying to portray which is Balance Sheet and Income Statement.
From the figures shown on the case, it is clear Costco revenue is smaller than Walmarts, yet Costco
is showing significance growth in this industry from 1990-2000 with CAGR 22.8%. In term of profit
Costco generates 602 Million USD in 2001.

2. Why did Torres Evaluate using ratio analysis and cash flow?
Because these two has different purpose and aims. Ratio analysis is focusing on key financial
performance of a company year by year and COMPARE with other competitors. Cash flow analysis
focuses on internal cash-ability which looking at how a company spend its money and where the
money comes from i
Ratio analysis will tells how well Costco performed over the year. Cash flow will tells how liquid
Costco is.

3. What did you learn from the case?

Common Financial Statement
a.

Costco has grown their profit from 1997 to 2001. Costco profit was USD 312M in 1997 to USD
602 M in 2001.

b. Costco shows good trend in operating efficiency from 1997 to 2001. It was 99.11% in 1997 and
now 99.03% in 2001
c.

However there is slight downturn in 2001 compare to 2000. Although the revenue has increased
from $31,621 to $34,137 but the profit has lower from 631M to 602M. The SG&A was increased
from $2,756 to $3,129. It perhaps from the Case indicates that Costco has opening more and
more store in 2001 that impact SG&A overall.

Sustainable Growth
a.

The ROE average was 17% from 1997 to 2000. However it was decreased on 2001 to 14.2%.
Net Income

602

631

515

460

312

Owners Equity

4,240

3,532

2,966

2,468

NA

Return on Equity (ROE)

14.20%

17.90%

17.40%

18.60%

NA

b. Costco over the year 1997-2001 has not paid dividend

c.

ROA is falling down in 1997-2001. From 8.4% in 1997 to 7.0% in 2001. This implies that the
company is generating less profit per dollar in assets ii

Benchmarking ratio in 2001 performance

a.

Gross margin: Sears is the highest in the industry, compare to Walmart and Costco with 26.6%
Gross Margin in 2001.

b. Operating Margin: Walmart is the highest in the industry with 5.94% in 2001. Surprisingly BJ
comes second with 4.41% with sales only 5,280. This indicates that BJ is the most profitable in
2001 from operating perspective.
c.

Net Margin, Walmart is the highest in the industry with 3.26% overall in 2001 and Costco is the
lowest with 1.73%.

d. Account Receivable: Sears seems have trouble in term of fluidity with 287 days long which
indicates that most the customers has not paid yet. Costco itself is relatively normal same like
Walmart and BJ.
e.

Account Payable: Costco is relatively normal in this industry with overall 33 days. Sears is the
worst with 100 days, this perhaps because of the problem of companys fluidity

4. Has Costco become more efficient?

Yes it is, from 1997 and 2001 Costco showing become more efficient. If we look at 2 factors
a.

From Operating Expense perspective

Common Size Financial Statement for Costco (1997-2001)

Total Operating Expenses

2001

2000

1999

1998

1997

99.03%

98.44%

98.59%

98.54%

99.11%

From above table if we can see operating expense was 99.11% in 1997, now in 2001 is 99.03% , it
downs to 0.08% which

b. From Inventory turnover

Inventory Turnover

Costco

Sears

Walmart

BJS

11.7

5.0

7.3

8.9

From above table it is clear that Costco has the highest inventory turnover among the industries.
Turnover of 11.7 times per year means that inventory is in a Costco warehouse for 31 days on
average (365 days divided by 11.7 turns per year). While BJ is 41 days Walmart 50 days and Sear
73 days.iii

http://www.investopedia.com/articles/stocks/07/easycashflow.asp
http://www.investopedia.com/terms/r/returnonassets.asp
iii
http://www.investopedia.com/terms/i/inventoryturnover.asp
ii