Appendix B: Financial analysis
Appendix B: Financial analysis
Financial analysis is the mean to clarify most important factors that affected Costco performance and resulted in companies’ success. In order to reach that goal, we studied financial performance of Costco for 2008 to 2012. These data obtained from different sources such as Costco annual reports and other respectable financial sources. At some levels comparison between leading companies in the industry such as Sam’s club and Bj’s has been made. The major problem that we faced during that process was that Sam’s club considered as subsidiary of Wall mart, which made comparison less sensitive.
By using financial statement, we calculated different financial ratios for liquidity, debt ratios and other significant in order to see the performance of Costco more clearly. We also performed DuPont analysis and identified return on asset and return on equity to get more details regarding the performance of Costco. Another step was to study the cash movement and the investment decisions that made during these five years and study the effects of those decisions. At the end, with the information collected, we studied the stock movements and the attractiveness of Costco’s stock for the investors.
Balance sheet statement for Costco in last five years (2008-2012) shown in figure 1. By looking at the balance sheet, we can see that the business had a steady growth in last few years. Even during the financial crises, they didn’t suffer that much and were able to maintain their performance. Another very interesting point is decrease of cash in 2012, when the company decided to buy the warehouses instead of renting them.
Costco had grown and expanded during last five years and they were able to maintain the success in new locations as well. By looking at construction section in balance sheet, the decrease in construction in 2009 is justified as financial crises just passed and all the companies were concerned with their expansion strategies. On the other hand, sharp increase in 2012 shows that Costco plans to grow at faster paste. Another positive sign for investors is that retain earning for 2012 is almost three times more than total liabilities of the company which shows financial strength for Costco.
Figure 1: Balance sheet (2008-2012) for Costco
The first important thing that shoes in income statement is the steady growth in revenue and net income for the company. In fact expect 2009, which was influenced by financial crises, the company shows steady growth in their revenue and net income for the past ten years, which was the greatest in 2009 and 2012 respectively. With respect to his information and the information from the balance sheet, clearly points to the fact Costco has shown strong performance in last few years and was able to adopt to changing market and customer needs.
They also should be concern about their shareholders wealth which will be discussed in following sections. Overall, the income statement shows that Costco has increased profit continuously and was able to predict and support customers demand successfully. During the financial recession, Costco was still profitable and their performance was notable, however they should be able to develop new strategies for such an event in future.
Figure 2: income statement
Cash flow form operation:
Figure 3 shows the cash flow from operations for the last five years. Expect for 2012, operation cash flow for Costco was grown at a considerable rate. However, in 2010 and 2011 the increase in cash flow from operations are noticeable. From 2.09 billion in 2009 to 3.2 billion in 2011, Costco has the cash and stability to invest and expand in the future.
Figure 3: cash flow statement. operating activities:
Cash flow from investment:
Costco’s overall investment activities have increased during past years as the company maintains a solid and steady position and the cash on hand increased noticeably. Costco expanding and they are trying to maintain and increase their expansion rate. They tried to maintain the selling rate for each store and that’s one of the reason that they don’t expand that fast as
some other companies.
Figure 4: cash flow statement. Investment activities:
Cash flow from financing activities:
Two main issues that should be attractive for investors are the big deduction of the long term debt and the amount of dividend paid by Costco specially in year 2012. Costco reduced its long term debt by more than 750 million which shows the stability of the company and of course less debt means less risk. The dividend payment itself has been growing rapidly for last 5 years, almost 70 percent which considered as great sign for investors. On the other hand, the capital gain that investors earn over last five years alone would make them happy, Costco’s stock price doubled in last five years.
Figure 5: cash flow statement. Financing activities:
Last point that stands out in cash flow statement is the increase in international sale, which was accounted for 27 percent of Costco’s total sale in 2012. International sale for Costco has increased by 50 percent since 2008 which shows great international expansion for Costco.
As it shows in chart 1, liquidity ratios shows perfect picture of the difference between wall mart and Costco, with respect to size of wall mart, Costco has much higher level of liquidity comparing to wall mart. Costco has taken more conservative approach and not relying that much on turning over its inventory. It is really hard to compare these two companies as Costco’s competitor is Sams club, which is a subsidiary of wall mart. At this time, Costco is planning to extend market share and maintain and increase its lead in the market.
According to chart 2, Costco has less debt ratio which generally means that the company is exposed to less risk than a competitor. However the debt ratio for wall mart is not that high either, with respect to size and operation level, so it is safe to say that both of these companies are at almost same level regarding their debt strategy. Debt to equity ratio shows that the companies have different growth strategies when in comes to expansions financed by debt. As you can see in the chart, Costco slightly depend on debt whereas wall mart is not. This also will affect their earnings as they have to pay much more interest.
Chart 3: DuPont analysis
As was expected, wall mart has much higher profit margin in both on assets and on equity. Once again, comparing Wall mart as a hole will not provide very effective comparison. Bit unfortunately the Sams club financial data is not available as a separate company and all comes to wall mart. The point to consider here is that Wall marts ROE and ROA were almost consistent during the past five year. Costco ROA does have a same situation. But we can see slight growth on ROE in Costco during past five years which can indicate increase in operations efficiency in Costco
To sum up, costco financial performance is outstanding in many categories. They passed the recession successfully and manage to be profitable in that time. Comparing to sams club, they are more successful in case of market share and profitability and they are currently the biggest player in market. Their stock price almost doubled during past five years and their dividend payment was steady. However international expansion is something that will make a difference in future.