Sec 10-K Costco Wholesale Corporation

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AMOUNTS IN MILLIONS

2016

2015

2014

Operating

$3,292

$4,285

$3,984

Investing

Financing

Rate Exchange on Cash/Cash Equivalents

$ 50

Beginning Cash/Cash Equivalents

$4,801

$5,738

$4,644

Ending Cash/Cash Equivalents

$3,379

$4,801

$5,738

While Costco’s income and cash flow are positive statements for future investors, the balance sheet also illustrates an attractive picture of the company’s financial position. Per its 2016 balance sheet, total assets calculated to $33.163 billion and unsurprisingly PP&E comprised the company’s largest asset. Buildings with a useful life of fifty years and equipment being carried for close to thirty, $17 billion was reported for property and equipment after $9.1 billion was deducted in accumulated depreciation. The difference of $15.1 billion, is consumed in current assets, with inventories being the largest at almost $9 billion and receivables barely over $1.2 billion. On the other side of the balance sheet, Costco’s liabilities include $15.6 billion of short term debt (including payables and accrued salaries of $7.6 billion and $2.6 billion, respectively) as well as roughly $4 billion in long-term debt, which is a result of five bonds being issued going back to 2007, with the last one being owed in 2022. With debt totaling $20 billion, the difference of almost $13 billion makes up owner’s equity.

So how liquid is Costco? The current ratio calculates to .97:1 and though this isn’t near the 2 to 1 ratio as most analysts would like, this industry’s ratio is only 1.09:1, but considering they paid $1.7 billion in payables at the end of the fiscal year as well as $1.2 billion of a bond which came due in December 2015, the company isn’t far off from the industry standard (EDIUNET, 2014). In regards to receivables, which is noted as unsettled credit and debit receivables, management states these normally settle within in a week (KPMG LLP, 2016). Essentially, they are correct as accounts receivable turnover is almost every four days and comparing this to the industry standards of 73 days, as per EDIUNET, Costco is far ahead of most companies. Lastly, the liquid test of inventory turnover, determining how fast a company can turn its inventory into cash, again EDIUNET asserts the industry standards are every 24 days and Costco is relatively close within a week’s time and would be able to sell most of its inventory in 31 days. Effectively, Costco can liquidate their assets quickly to remunerate its debts, if there should ever be a need. Fig. 4 below is snapshot of these ratios.

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2016

2015

2014

CURRENT RATIO

.97:1

1.01:1

1.2:1

ACCOUNTS RECEIVABLE TURNOVER

3.89 DAYS

3.80 DAYS

3.89 DAYS

INVENTORY TURNOVER

31.7 DAYS

31.4 DAYS

30.3 DAYS

Other key ratios to analyze Costco’s overall financial performance are the asset turnover ratio and times interest earned ratio. These two calculations can further assess how efficient the company is using its assets to generate revenue and if the company can pay its debt with earnings before interest and taxes. With sales totaling $116 billion and total assets amounting to $33.2 billion, 2016’s asset turnover ratio is 3.5 compared favorably to the industry’s standard of 1.92. In comparison to the last two years, this ratio has remained consistent (see Fig. 5). Times interest earned computes to a complimentary ratio of 28.21, which exceeds the industry’s standards of 11.97. This number has fallen slightly within the last two years, and this is a result of two bonds being issued in February 2015, with the first payment being made at the beginning of the fiscal year, thus interest accrued and increased the interest expense account from the prior year (Fig. 5).

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2016

2015

2014

ASSETS TURNOVER

3.50

3.44

3.34

TIMES INTEREST EARNED

28.21

30.1

29.29

Lastly and most importantly, is the shareholders, the real owners of the company. As of October 4, 2016, there were 8,572 shareholders and 437,126,569 shares of common stock outstanding (KPMG LLP, 2016). As of February 15, 2017, Costco’s market value per share was $175. New investors would be investing approximately $31 for every dollar of the company’s earnings based upon the price-earnings ratio and this looks to be a good investment as this value has risen over the last two years (market value reflects February 18 of the last two years) (NASDAQ, 2017). Unfortunately, the return on shareholder’s equity remained flat in comparison to 2015 and shareholders were paid roughly 32% of the company’s earnings (Fig. 6).

2016

2015

2014

PRICE-EARNINGS RATIO