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Analysis of Costco Wholesale Company Ratio
Introduction
It is important to note that the performance ratios of a company play a critical role in assessing and monitoring the overall validity of the organization as a business enterprise. The given analysis will primarily focus on evaluating the financial condition of Costco Wholesale Corporation on the basis of its financial statement from 2021. The selected ratios include return on stockholders equity, current ratio, debt to assets, total assets turnover, and price earnings ratio.
Ratio Calculations
Profitability ratios: Return on stockholders equity = profits after taxes/total stockholders equity
Profits after taxes = $5,007,000,000 (Costco Wholesale Corporation, 2021)
Total stockholders equity = $17,564,000,000 (Costco Wholesale Corporation, 2021)
Return on stockholders equity = $5,007,000,000/$17,564,000,000 = 0.29
Liquidity ratios: Current ratio = current assets/current liabilities
Current assets = $29,505,000,000 (Costco Wholesale Corporation, 2021)
Current liabilities = $29,441,000,000 (Costco Wholesale Corporation, 2021)
Current ratio = $29,505,000,000/$29,441,000,000 = 1.00
Leverage ratios: Debt to assets = total debt/total assets
Total debt = Current portion of long-term debt + Long-term debt, excluding current portion = $799,000,000 + $6,692,000,000 = $7,491,000,000 (Costco Wholesale Corporation, 2021)
Total assets = $59,268,000,000 (Costco Wholesale Corporation, 2021)
Debt to assets = $7,491,000,000/$59,268,000,000 = 0.13
Activity ratios: Total assets turnover = sales/total assets
Sales = $195,929,000,000 (Costco Wholesale Corporation, 2021)
Total assets = $59,268,000,000 (Costco Wholesale Corporation, 2021)
Total assets turnover = $195,929,000,000/$59,268,000,000 = 3.31
Shareholders return ratios: Price earnings ratio = current market price per share/after tax earnings per share
Current market price per share = $517.49 (Yahoo Finance, 2022)
After tax earnings per share = $11.30 (Costco Wholesale Corporation, 2021)
Price earnings ratio = $517.49/$11.30 = 45.80
Organizational Performance
From an investors perspective, the most relevant ratio is a return on stockholders equity because it showcases the company can be perceived as an investment opportunity. However, the current ratio provides the most fundamental and core insight into the current performance level of Costco Wholesale Corporation. It is stated that a current ratio lets a company know if it has enough cash flow to pay its immediate debts and liabilities, should it become necessary (Calvello, 2019, para. 6). The calculated ratio is 1, but a good current ratio is typically anywhere between 1.5 and 2, which means that Costco Wholesale Corporation has a moderate or negative ratio (Calvello, 2019, para. 5). Therefore, the current ratio of the company is concerning considering the current level of geopolitical instability and the presence of the global pandemic. Organizations need to be prepared for economic disturbances, and the current ratio must be maintained at higher levels than 1.
Strategic Alliance
When two organizations form a strategic alliance, the goal is to consolidate their efforts and manage the competition in order to achieve a greater degree of profitability rather than undermining each others efforts. The risk of such a joint unity is manifested in the fact that one might benefit more from the alliance than the other, or both can fail to cooperate due to mistrust, lack of commitment, and cultural differences. The net profit margin would be the most immediate indicator of the alliances effectiveness since profit is the bottom line for such a collaborative effort. If company As net profit margin decreased after entering a strategic alliance with company B, then it is an ineffective alliance for company A. Ideally, both companies should reach higher profitability by eliminating waste of resources on competition and extreme price reduction.
Value-Enhanced Capital
In the current financial environment, it is fairly likely that the organization could acquire the capital necessary to support an aggressive value-enhancement strategy. The most likely source of capital might come from borrowing or issuing stock with an emphasis on the former. The main reason is that the current interest rate is equal to 2.31%, which is lower than 2019 (The World Bank, 2022). The realistic interest rate the firm might incur might be a little higher than the stated number, which is between 2.5 to 4%. The current ratio will be the most impacted by the influx of capital since current liabilities will be affected by borrowing. Therefore, the aggressive value-enhancement strategy is possible under the current economic conditions of capital availability, but the company needs to ensure that specific measures are undertaken to minimize the risk associated with such an approach.
Conclusion
In conclusion, the assessment of the financial ratios of Costco Wholesale Corporation was conducted. The selected ratios include return on stockholders equity, current ratio, debt to assets, total assets turnover, and price earnings ratio. The calculations revealed that the current ratio value for the company is too low, which is critical in the current period of economic, public health, and geopolitical instability. Therefore, the companys lack of liquidity is concerning, which is why it needs some strategic interventions. Net profit margin is the most important indicator for a strategic alliance since it is directly related to the bottom line of the parties involved. Borrowing is a plausible option to acquire capital, and the current ratio can also be impacted by an influx of such capital.
References
Calvello, M. (2019). What is a current ratio? (+the current ratio formula). G2. Web.
Costco Wholesale Corporation. (2021). Form 10-K [PDF document]. Web.
The World Bank. (2022). Real interest rate (%) United States. Web.
Yahoo Finance. (2022). Costco Wholesale Corporation (COST). Web.
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