Costco Case Analysis Essay Example

turnover of 28.50 days. This demonstrates that Costco does not need extra resources for storing unsold products, effectively reducing handling costs associated with excess merchandise.

The ideal inventory turnover ratio should be as high as possible, indicating the number of inventory turns per year. In 2006, Costco had a ratio of 12.81, meaning they sold and replaced their inventory approximately 13 times. This high turnover supports their high annual sales, as it shows that Costco was able to quickly sell a large volume of inventory. This suggests that they are performing well in their market, indicating that their strategy of quick turnover is successful.

In addition, we evaluated Costco's capacity to liquidate its assets in case of necessity. In 2006, Costco's current ratio stood at 1.05. This ratio being above 1.0 signifies that Costco can settle its short-term obligations using its short-term assets. Conversely, a ratio lower than 1.

0 typically indicates that a company is not able to turn its assets into liquid cash fast enough to pay its debtors. In 2006, Costco had a working capital of $413,000, indicating that the company has funds available to pay its liabilities promptly and expand without borrowing money. Additionally, it suggests that Costco has minimal funds tied up in its inventory and outstanding customer payments. This level of working capital reflects the efficiency of Costco in maximizing sales and collecting payments. However, it is important to note that Costco's working capital in 2006 was significantly lower than the $1,477,000 in 2005.

The significant decrease in capital could raise concerns for potential investors as it suggests a decline in sales and smaller accounts receivable. However, this decrease is due to Costco's

expansion efforts in 2005 and 2006. Despite expanding annually, Costco remains financially stable, indicating positive financial liquidity. On the downside, one aspect that stands out is Costco's profitability valuation. Compared to the retail industry and the S;P 500, Costco's profit margins (gross, operating, and net) are significantly lower. Costco's net profit margin, or net return on sales, was only 1%.

In 2006, Costco had a return on stockholders' equity (ROE) of 12.06%, which is considered sluggish compared to the industry average of roughly 7%. This indicates that Costco's performance in terms of ROE was less than half of the industry average for that year. The book's average ROE range of 12-15% does not fully demonstrate this significant difference.