University of California Irvine Costco and Target Risk Profile Paper in the attached files, we have case one and case two, but case one was last HW that we

University of California Irvine Costco and Target Risk Profile Paper in the attached files, we have case one and case two, but case one was last HW that we have finished. we need to do case two and compare with case one paper. only do E and F part. 2-3 pages. Financial Statement Ratio Analysis of Costco
Introduction
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began
operations in 1983, in Seattle, Washington. They are principally engaged in the operation of
membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom
(U.K.), Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and through a majorityowned subsidiary in Taiwan. However, the most recent data represented Costco operated 782
worldwide warehouses in 2019, and the material seasonal impact in our operations is increased
net sales and earnings during the winter holiday season.
Costco operates membership warehouses based on the concept that offering our members
low prices on a limited selection of nationally branded and private-label products in a wide range
of categories will produce high sales volumes and rapid inventory turnover. When combined
with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced
handling of merchandise in no-frills, self-service warehouse facilities, these volumes and
turnover enable us to operate profitably at significantly lower gross margins (net sales less
merchandise costs) than most other retailers.
Costco buys most of our merchandise directly from manufacturers and routes it to crossdocking consolidation points (depots) or directly to our warehouses. When they depots receive
large shipments from manufacturers, they will quickly ship these goods to warehouses. This
process creates freight volume and handling efficiencies, lowering costs associated with
traditional multiple-step distribution channels.
Key Accounts
The key accounts for Costco should be liquidity ratio, debt ratio, and market value ratio.
Since liquidity ratios show the relationship of a firm’s current assets and current liabilities, and it
relates to whether Costco has the ability to deal with high risk debt problems and facing its debt
obligations. However, market value ratio gives confidence to investors and helps them indicate
whether the firms can be invested or not.
Ratio Analysis
1. Liquidity Ratios
Liquidity ratios show the relationship of a firm’s current assets to its current liabilities
and thus its ability to meet maturing debts.
a. Current Ratio
I.
Definition
Current Ratio indicates the extent to which current liabilities are covered by those assets
expected to be converted to cash in the near future.
II.
How Calculated
Current Ratio = Current Assets / Current Liabilities
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
Current Assets
23,485
20,289
17,317
Current Liabilities
29,816
27,727
25,268
0.79
0.73
0.69
Current Ratio
0.10
% change
IV.
Interpretation
15%
From 2017 to 2019, the percentage of current ratio increased 15%, so it means Costco has
a better ability to pay off the liabilities than last year because their current assets increased
$6,168 million during 2017 to 2019 this period. Even their liabilities increase year by year, their
current ratio increasing as well.
b. Quick Ratio
I.
Definition
The quick ratio, which measures the firm’s ability to pay off short-term obligations
without relying on the sale of inventories.
II.
How Calculated
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
Current Assets
23,485
20,289
17,317
Inventories
11,395
11,040
9,834
Current
Liabilities
29,816
27,727
25,268
0.41
0.33
0.30
Quick Ratio
0.11
% change
IV.
37%
Interpretation
From 2017 to 2019, the percentage of quick ratio increased 37%, so it means the ability
of the company to pay off the short-term obligations is better than last year even though their
inventories and current liabilities both increased during 2017 to 2019 this period.
2. Asset Management Ratio
Asset management ratios measure how effectively a firm is managing its assets.
a. Inventory Turnover
I.
Definition
As the name implies, these ratios show how many times the particular asset is “turned
over” during the year.
II.
How Calculated
Inventory Turnover Ratio = Cost of Goods Sold / Inventory
III.
Ratio Results (in Million, $ in Million)
2019
Cost of Goods Sold
Inventory
Inventory Turnover Ratio
2018
2017
147,880
137,028
124,832
11,395
11,040
9,834
12.98
12.41
12.69
0.22
% change
IV.
1.7%
Interpretation
From 2017 to 2019, the percentage of inventory turnover ratio growth by 1.7%, so that
means the demand of company’ products increased even though just 1.7%, their cost of goods
sold increased $23,048 million during 2017 to 2019 this period.
b. Days Sales Outstanding (DSO)
I.
Definition
It indicates the average length of time the firm must wait after making a sale before it
receives cash.
II.
How Calculated
Days Sales Outstanding = Receivable / Average Sales Per Days = Receivable / Annual
Sales / 365
III.
Ratio Results (in Million, $ in Million)
2019
Receivable
Annual Sales/365
Days Sales Outstanding
2018
2017
1,535
1,669
1,432
418.36
387.88
353.5
3.67
4.30
4.05
(0.38)
% change
IV.
-9%
Interpretation
From 2017 to 2019, the percentage change of days sales outstanding decreased by 9%, so
it means the cash flow of 2019 is using more efficiently than 2017. Since both receivable and
annual sales per day in 2019 are higher than 2017, they have better management ability in 2019.
c. Fixed Assets Turnover
I.
Definition
The fixed assets turnover ratio, which is the ratio of sales to net fixed assets, measures
how effectively the firm uses its plant and equipment.
II.
How Calculated
Fixed Assets Turnover Ratio = Total Sales (Revenue) / Total Net Fixed Assets
III.
Ratio Results (in Million, $ in Million)
Total Sales
Total Net fixed assets
2019
2018
2017
$149,351
$138,434
$126,172
20,890
19,681
18,161
7.15
7.03
6.95
Fixed assets turnover ratio
0.20
% change
IV.
3%
Interpretation
From 2017 to 2019, the percentage of fixed asset turnover ratio increased 3%, so it means
the company’ operating performance is growing more than before since their total sales and total
net fixed assets are both getting higher.
d. Total Assets Turnover
I.
Definition
Measures the turnover of all of the firm’s assets
II.
How Calculated
Fixed Assets Turnover Ratio = Total Sales (Revenue) / Total Assets
III.
Ratio Results (in Million, $ in Million)
Total Sales
Total Assets
Total assets turnover ratio
2019
2018
2017
$149,351
$138,434
$126,172
45,400
40,830
36,347
3.29
3.39
3.47
(0.18)
% change
IV.
-5.19%
Interpretation
From 2017 to 2018, the percentage of the Total assets turnover ratio decreased by 5.19%,
so it means their efficiency of using their assets to general sales is getting poorer than before
even though their total sales and total assets have increased, their assets turnover ratio is less than
before.
3. Debt Management Ratio
Debt-management ratios measure how much of a company’s operations come from debt,
rather than other forms of financing such as stocks or personal savings. The debt-management
ratio is one of the measures of a company’s risk and the likelihood of default.
a. Total liabilities to Total assets ratio
I.
Definition
Total liability to total assets ratio is the percentage of total liabilities at the end of the period
divided by total assets, that is, the ratio between total liabilities and total assets. The assetliability ratio reflects how much of total assets is financed by borrowing, and also measures the
extent to which a firm protects the interests of creditors in a liquidation. The debt-to-asset ratio is
a measure of the proportion of total capital provided by creditors.
II.
How Calculated
Total liabilities to total assets ratio = Total liability / Total assets
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
Total Liabilities
29,8
16
27,
727
25,26
8
Total Assets
45,4
00
40,
830
36,34
7
65.67%
67.91%
69.52%
Ratio Results
-3.84%
% Change
IV.
-5.53%
Interpretation
Total liability to total assets ratio reflects the degree to which the auditee protects the
creditor’s rights and interests, and is used to measure the auditee’s solvency. For creditors, the
lower the ratio of liabilities to assets is, the better. The lower the ratio of liabilities to assets is,
the more assets can be used to pay off debts, the stronger the solvency of the audited entity is,
and the higher the security degree of creditors’ lent funds is. On the contrary, it indicates that the
weaker the solvency of the audited entity, the lower the security degree of the creditor’s loan. The
higher the proportion is, the more debts the enterprise needs to repay in the short term, and the
greater the business risk and capital pressure of the enterprise is. Once the enterprise’s capital
supply is insufficient, the enterprise may go bankrupt.
For enterprises: generally speaking, the appropriate level of total liability to total assets ratio
is 40% – 60%. The debt-to-asset ratio of 70% is called the red line. If the total liability to total
assets ratio reaches 100% or more than 100%, the company has no net assets or is insolvent.
However, the total liability to total assets ratio of different industries is not the same. To
judge whether the asset-liability ratio is reasonable, it can be judged from the following different
perspectives:
1. From the perspective of creditors, what they are most concerned about is whether the
principal and interest can be recovered on schedule. They hope that the lower the debt ratio is the
better, the enterprise’s debt repayment is guaranteed, and the loan will not be too risky.
2. From the perspective of shareholders, what they care about is the cost of borrowed capital.
When the profit margin of all capital is higher than the borrowing interest rate, the larger the debt
ratio is the better, and vice versa.
3. From the perspective of the operator, if the debt is very large, beyond the psychological
endurance of the creditors, the enterprise has no money to borrow; If there is no debt, it indicates
that the enterprise’s management is conservative or lack of confidence, the ability to use the
capital of creditors for business activities is insufficient. Therefore, business operators should
weigh the gains and losses, and define a reasonable asset-liability ratio interval.
Costco has a high total liability to total assets ratio , which has been above 60% for three
years in a row. In 2017, the total liability to total assets ratio reached 69.52%, close to the
70 %warning line. From 2017 to 2019, Costco’s total liability to total assets ratio has been
steadily decreasing year by year. Costco’s debt-to-asset ratio fell 3.84% over three years,
decreasing amplitude to 5.53%.
b. Debt-to equity ratio
I.
Definition
The debt-to-equity ratio is a financial ratio indicating the relative proportion of
shareholders’ equity and debt used to finance a company’s assets. Closely related to leveraging,
the ratio is also known as risk, gearing or leverage.
II.
How Calculated
Debt-to equity ratio = Total debt / Equity
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
29,816
27,7
27
25,2
68
Total equity
15,584
13,1
03
11,0
79
Ratio Result
191.32%
211.61%
228.07%
Total Liabilities
-36.75%
% Change
IV.
-16.11%
Interpretation
Costco’s debt-to-equity ratio declined by 36.75% from 228.07% in 2017 to 191.32% in
2019, decreasing amplitude to 16.11%.. Since there is no clear numerical standard for debt-toequity, I should refer to the comparative analysis of the data of the same industry. I found the
comparison of debt-to-equity between Walmart and Target:
Debt-to-equity ratio: Walmart
2020
2019
2018
Total Liabilities
77,79
0
77,477
78,52
1
Total equity
81,55
2
79,634
80,82
2
Ratio Result
95.39%
97.29%
97.15%
-1.77%
% Change
-1.82%
Debt-to-equity ratio: Target
2020
Total Liabilities
14,487
2019
2018
15,014
13,05
2
Total equity
11,833
11,297
11,65
1
Ratio Result
122.43%
132.90%
112.02%
10.40%
% Change
9.29%
Walmart’s debt-to-equity ratio has been between 95% and 100% for three consecutive
years, with a small change range and basically stable. The debt-to-equity ratio of Target has
fluctuated slightly between 110% and 135% for three consecutive years, with a year-on-year
growth of 9.29%
Costco’s debt-to-equity ratio is significantly higher than that of Walmart and Target.
Although Costco has cut its debt-to-equity ratio for three consecutive years, it is still at a higher
level in the industry, which poses some risks for investors.
c. Times-Interest-Earned (TIE)
I.
Definition
The times interest earned (TIE) ratio is a measure of a company’s ability to meet its debt
obligations based on its current income. The formula for a company’s TIE number is earnings
before interest and taxes (EBIT) divided by the total interest payable on bonds and other debt.
II.
How Calculated
Times-Interest-Earned (TIE) = EBIT / Interest Charges
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
4,737
4,480
4,11
1
150
159
134
31.58
28.18
30.68
EBIT
Interest Expense
Ratio Results
0.90
% Change
IV.
2.94%
Interpretation
Informally, %change less than 5% is Not good, Between5% -10% good, and
between10% is good. Costco %change is only 2.94%, which is not good.
Through the comprehensive analysis of the above three Debt ratios, Costco has a higher
Debt ratio and higher investment risk. Investors should weigh Costco’s other data to decide
whether to invest.
4. Profitability Ratio
Profitability ratios are a class of financial metrics that are used to assess a business’s
ability to generate earnings relative to its revenue, operating costs, balance sheet assets, and
shareholders’ equity over time, using data from a specific point in time.
a. Operating Margin
I.
Definition
The operating margin measures how much profit a company makes on a dollar of sales,
after paying for variable costs of production, such as wages and raw materials, but before paying
interest or tax.
II.
How Calculated
Operating Margin = EBIT / Sales
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
EBIT
Sales
Ratio Results
4,737
4,480
4,111
149,
351
138,4
34
126,1
72
3.17%
3.24%
3.26%
(0.19%)
% Change
IV.
-2.66%
Interpretation
Costco’s Operating margin fluctuated around 3.2% from 2017 to 2019. Costco’s
operating margin of 3.2% means that each dollar earned in revenue brings 3.2 cents in profit.
b. Net Profit Margin
I.
Definition
Net profit margin is the percentage of revenue remaining after all operating expenses,
interest, taxes and preferred stock dividends (but not common stock dividends) have been
deducted from a company’s total revenue.
II.
How Calculated
Net profit Margin = Net income / Sales
III.
Ratio Results (in Million, $ in Million)
2019
Net Income
Sales
Ratio Results
2018
2017
3,659
3,134
2,679
149,351
138,434
126,17
2
2.4%
2.3%
2.1%
0.33%
% Change
IV.
15.38%
Interpretation
Costco’s net profit margin increased slowly, from 2.1% in 2017 to 2.4% in
2019. Profit margins vary by industry, so compare the net profit margins of the same
industry: Walmart and Target：
Net Profit Margin:
Walmart
2020
Net Income
Sales
Ratio Results
2019
2018
14,881
6,670
9,862
519,926
510,3
29
495,7
61
2.9%
1.3%
2.0%
0.0087
% Change
43.88%
Net Profit Margin: Target
2020
Net Income
Sales
Ratio Results
3,281
2019
2018
2,937
2,914
77,130
74,433
71,78
6
4.3%
3.9%
4.1%
0.0019
% Change
4.79%
Walmart’s net profit margin has fluctuated considerably over the past three years, due to
lower net income in 2019. Overall net profit is in the 2-3% range, with a net profit margin of
2.9% in 2020, the highest in three years. Target’s net profit margin has been adjusted slightly
over the past three years to around 4% to 4.5%, the highest among the three. Costco’s net profit
margin is between Walmart and Target, with three years of steady growth.
c. Return on Total Assets (ROA)
I.
Definition
Return on assets is a profitability ratio that provides how much profit a company is able
to generate from its assets. In other words, return on assets (ROA) measures how efficient a
company’s management is in generating earnings from their economic resources or assets on
their balance sheet.
II.
How Calculated
Return on Total Assets (ROA)= net income / total assets
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
Net Income
3,659
3,134
2,679
Total assets
45,400
40,830
36,34
7
Ratio Results
8.06%
7.68%
7.37%
0.69%
% Change
IV.
9.35%
Interpretation
Costco’s ROA ratio grew steadily from 7.37% to 8.06% from 2017 to 2019. Costco’s
ROA has grown 9.35% in the last three years. ROA measures cents earned by a business per
dollars of its total assets. A high return on assets (ROA) is generally better than a low ratio.
Similarly, an improving ROA is considered a good sign.
d. Return on Equity (ROE)
I.
Definition
The return on equity is a measure of the profitability of a business in relation to the
equity. Because shareholder’s equity can be calculated by taking all assets and subtracting all
liabilities, ROE can also be thought of as a return on assets minus liabilities.
II.
How Calculated
Return on Equity Ratio (ROE) = Net income / Common equity
III.
Ratio Results (in Million, $ in Million)
2019
2018
2017
Net Income
3,659
3,134
2,679
Total equity
15,584
13,103
11,079
Ratio Results
23.48%
23.92%
24.18%
(0.70%)
% Change
IV.
-2.90%
Interpretation
From 2017 to 2019, Costco’s ROE remains at 23-24%, which is very stable. Over the past
three years, Costco’s ROE decreased amplitude by 2.9 per cent. ROE is a very important ratio for
investors. Warren Buffett believes that changes in the ROE ratio are a very important indicator.
ROE focus on company performance and thinks long term.
d. Basic Earning Power (BEP)
I.
Definition
Basic earning power (BEP) ratio is a measure that calculates the earning power of a
business before the effect of the business’ income taxes and its financial leverage.
II.
How Calculated
Basic earning power(BEP) = EBIT / Total assets
III.
Ratio Results (in Million, $ in Million)
2019
EBIT
2018
2017
4,737
4,480
4,111
Total Assets
45,400
40,830
36,347
Ratio Results
10.43%
10.97%
11.31%
(0.88%)
% Change
IV.
-7.75%
Interpretation
Costco’s Basic Earning Power has been declining from 2017 to 2019, from 11.31 percent
in 2017 to 10.43 percent in 2019, a total decline of 0.88 percent. The three-year cumulative
decline was 7.75%.
5. Market Value Ratio
We use market value ratios to estimate the current share price of shares of listed
companies. Current and potential investors use those ratios to decide whether a company’s shares
are high or low. Below are some common market value ratios.
a. Price/Earning (P/E)
I.
Definition
We calculated it as the current market price of a share, divide by earning per share. If we
want to compare the ratio of our company with the competing companies, we can use this
ratio to decide whether the shares are underpriced or overpriced.
How Calculated
Price earning ratio= Market value per share/Earning per share
II.
III.
Ratio Result
2019
2018
2017
Current market
price of share
216042.35
191214.11
170978.52
Reported earnings
per share
8.32
7.15
6.11
Price/earning ratio
25964.95
26755.03
27981.82
Interpretation
From 2017 to 2018, this ratio decreases from $27.98K to 26.75K. From 2018 to 2019,
this ratio decreases from $26.75K to $25.96K. It means that from 2017 to 2109, the
price/earning ratio decreases. The lower the price/earning ratio of a stock, the lower the
profitability of the market price relative to the stock, indicating that the shorter the
payback period, the smaller the investment risk and the greater the investment value of
the stock.
b. Market/Book (M/B)
I.
Definition
The book-to-m…
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