In this assignment, you will recalculate the value of the company’s stock based on your company’s specific required rate of return. To do this, you will calculate the required rate of return for your chosen publicly traded company using the capital asset pricing model (CAPM).
Last week, you determined a preliminary estimate of the company’s stock price using the constant growth formula. To simplify the calculation, you were required to use general market required rates of return, based on size. However, this is an assumption that does not account for the specific risk of an investment in a specific company. This week, you will calculate the required rate of return for your chosen publicly traded company using the CAPM. The CAPM is a more precise tool to estimate a firm’s required rate of return. This tool is “tremendously valuable because required returns are used as the discount rates in the valuation formulas when doing time value of money problems and security valuation” (Hickman et al., 2013, Section 9.3, para. 1). You will then use this CAPM required rate of return to revise your stock price value based on the constant growth formula. This will allow you to determine your final recommendation of buy, hold, or sell.
Write:
In your paper, address the following five parts in a Word document:
Part 1:
Explain the three types of risk and beta, and how these concepts relate to a company’s required rate of return.
Part 2:
Find your company’s beta from a credible source.
You can get this information from the Mergent database or by looking it up on a financial website like
Yahoo! FinanceLinks to an external site.
.
Calculate the company-specific required rate of return using the CAPM formula.
Show all calculations.
Use the beta you determined for your chosen company
For the market risk premium, use the following assumptions:
For a mid-cap company (between $2.0 billion and $10.0 billion in market capitalization) use 8.0% as the market risk premium.
For a small-cap company (less than $2.0 billion in market capitalization) use 11.0% as the market risk premium.
Compare the company-specific required rate of return you calculated to the required return based on size you used in Section 3: Dividend Analysis and Preliminary Valuation in Week 3 for the constant growth formula.
Determine whether the company-specific required rate of return higher or lower than the rate of return based on size that you used in Section 3 in Week 3 for the constant growth formula?
Explain the difference in required rate of returns.
Part 3:
Review your selected high-end and low-end growth rates from Week 3.
Compare each of the two recalculated stock prices to the current stock price per share of the company.
Use either the high-end stock price or the low-end stock price from the constant growth formula using the CAPM required rate of return.
The Section 4: Valuation Conclusion paper Powered by Clearbit
Costco Wholesale Corp (NMS: COST)
Company Financials
Income Statement
Exchange rate used is that of the Year End reported
date
As Reported Annual Income Statement
Report Date
08/28/2022
Currency
USD
Audit Status
Not Qualified
Consolidated
Yes
Scale
Thousands
Net sales
$ 222.730.000
Membership fees
$
4.224.000
Total revenue
$ 226.954.000
Merchandise costs
$ 199.382.000
Selling, general & administrative expenses
$ 19.779.000
Preopening expenses
Operating income
$
7.793.000
Interest expense
$
158.000
Interest income
$
61.000
Foreign-currency transactions gains (losses), net
$
106.000
Other interest income & other income, net
$
38.000
Interest income & other income, net
$
205.000
Income before income taxes – domestic
$
5.759.000
Income before income taxes – foreign
$
2.081.000
Income before income taxes
$
7.840.000
Current federal provison (benefit) for income taxes
$
798.000
Deferred federal provison (benefit) for income taxes
$
(35.000)
Total federal provison (benefit) for income taxes
$
763.000
Current state provison (benefit) for income taxes
$
333.000
Deferred state provison (benefit) for income taxes
$
(5.000)
Total state provison (benefit) for income taxes
$
328.000
Current foreign provison (benefit) for income taxes
$
851.000
Deferred foreign provison (benefit) for income taxes
$
(17.000)
Total foreign provison (benefit) for income taxes
$
834.000
Provision for income taxes
$
1.925.000
Net income (loss) including noncontrolling interests
$
5.915.000
Net loss (income) attributable to noncontrolling interests$
(71.000)
Net income attributable to Costco Wholesale Corp
$
5.844.000
Weighted average shares outstanding – basic
443.651
Weighted average shares outstanding – diluted
444.757
Year end shares outstanding
442.664
Net income (loss) per common share – basic
$
13,17
Net income (loss) per common share – diluted
$
13,14
Cash dividends declared per common share
$
3,38
Number of full time employees
Number of part time employees
Total number of employees
304000
Number of common stockholders
10279
Foreign currency translation adjustments
-721000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
08/29/2021
USD
Not Qualified
Yes
Thousands
192.052.000
3.877.000
195.929.000
170.684.000
18.461.000
76.000
6.708.000
171.000
41.000
56.000
46.000
143.000
4.931.000
1.749.000
6.680.000
718.000
84.000
802.000
265.000
11.000
276.000
557.000
(34.000)
523.000
1.601.000
5.079.000
(72.000)
5.007.000
443.089
444.346
441.825
11,30
11,27
12,98
288000
9958
181000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
08/30/2020
USD
Not Qualified
Yes
Thousands
163.220.000
3.541.000
166.761.000
144.939.000
16.332.000
55.000
5.435.000
160.000
89.000
7.000
(4.000)
92.000
4.204.000
1.163.000
5.367.000
616.000
77.000
693.000
230.000
8.000
238.000
372.000
5.000
377.000
1.308.000
4.059.000
(57.000)
4.002.000
442.297
443.901
441.255
9,05
9,02
2,70
156000
117000
273000
9690
162000
Balance Sheet
Exchange rate used is that of the Year End reported
date
As Reported Annual Balance Sheet
Report Date
Currency
Audit Status
Consolidated
Scale
Cash & cash equivalents
08/28/2022
USD
Not Qualified
Yes
Thousands
$ 10.203.000
Short-term investments
Receivables, net
Merchandise inventories – U.S.
Merchandise inventories – Canada
Merchandise inventories – other international
Merchandise inventories
Other current assets
Total current assets
Land
Buildings & improvements
Equipment & fixtures
Construction in progress
Property & equipment, gross
$
$
$
$
$
$
$
$
$
$
$
$
$
Less accumulated depreciation & amortization
Property & equipment, net
Operating lease right-of-use assets
Other long-term assets
Total assets
Accounts payable
Current portion long-term debt
Accrued salaries & benefits
Accrued member rewards
Deferred membership fees
Other current liabilities
Total current liabilities
Senior notes
Other long-term debt
Total long-term debt
Less unamortized debt discounts & issuance costs
Less: current portion
Long-term debt, excluding current portion
Long-term operating lease liabilities
Other long-term liabilities
Total liabilities
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total Costco Wholesale Corp stockholders’ equity
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
08/29/2021
USD
Not Qualified
Yes
Thousands
11.258.000
$
08/30/2020
USD
Not Qualified
Yes
Thousands
12.277.000
846.000
2.241.000
13.160.000
1.966.000
2.781.000
17.907.000
1.499.000
32.696.000
7.955.000
20.120.000
10.275.000
1.582.000
39.932.000
$
$
$
$
$
$
$
$
$
$
$
$
$
917.000
1.803.000
10.248.000
1.456.000
2.511.000
14.215.000
1.312.000
29.505.000
7.507.000
19.139.000
9.505.000
1.507.000
37.658.000
$
$
$
$
$
$
$
$
$
$
$
$
$
1.028.000
1.550.000
8.871.000
1.310.000
2.061.000
12.242.000
1.023.000
28.120.000
6.696.000
17.982.000
8.749.000
1.276.000
34.703.000
15.286.000
24.646.000
2.774.000
4.050.000
64.166.000
17.848.000
73.000
4.381.000
1.911.000
2.174.000
5.611.000
31.998.000
6.000.000
590.000
6.590.000
(33.000)
73.000
6.484.000
2.482.000
2.555.000
43.519.000
2.000
6.884.000
(1.829.000)
15.585.000
20.642.000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
14.166.000
23.492.000
2.890.000
3.381.000
59.268.000
16.278.000
799.000
4.090.000
1.671.000
2.042.000
4.561.000
29.441.000
6.800.000
731.000
7.531.000
(40.000)
799.000
6.692.000
2.642.000
2.415.000
41.190.000
4.000
7.031.000
(1.137.000)
11.666.000
17.564.000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12.896.000
21.807.000
2.788.000
2.841.000
55.556.000
14.172.000
95.000
3.605.000
1.393.000
1.851.000
3.728.000
24.844.000
6.800.000
857.000
7.657.000
(48.000)
95.000
7.514.000
2.558.000
1.935.000
36.851.000
4.000
6.698.000
(1.297.000)
12.879.000
18.284.000
ROA (return on assets)
a ratio that masures how profitable a cmpany is given its assets
net income / average total assets
Total Assets (in Net Income (in
Thousands)
Thousands)
ROA
2022 $ 64.166.000 $ 5.915.000
2021 $ 59.268.000 $ 5.079.000
$ 123.434.000
avg total assets $ 61.717.000
Year
9,58%
8,23%
ROE (return on equity)
income earned for each doller invested by stockholders
avg stockholders’ equity is beg. Bal + ending balance / 2
net income / avg stockholders’ equity
Year
Avg.
Stockholders’ ROE
Equity
5.915.000 $ 20.642.000
5.079.000 $ 17.564.000
$ 38.206.000
$ 19.103.000
Net Income (in
Thousands)
2022 $
2021 $
30,96%
26,59%
Noncontrolling interests
Total equity
$
5.000
$ 20.647.000
$
$
514.000
18.078.000
$
$
421.000
18.705.000
Cash Flows
Exchange rate used is that of the Year End reported
date
As Reported Annual Cash Flow
Report Date
08/28/2022
Currency
USD
Audit Status
Not Qualified
Consolidated
Yes
Scale
Thousands
Net income (loss) including noncontrolling interests
$
5.915.000
Depreciation & amortization
$
1.900.000
Non-cash lease expense
$
377.000
Stock-based compensation
$
724.000
Other non-cash operating activities, net
$
76.000
Deferred income taxes
$
(37.000)
Merchandise inventories
$ (4.003.000)
Accounts payable
$
1.891.000
Other operating assets & liabilities, net
$
549.000
Net cash flows from operating activities
$
7.392.000
Purchases of short-term investments
$ (1.121.000)
Maturities & sales of short-term investments
$
1.145.000
Additions to property & equipment
$ (3.891.000)
Acquisitions
Other investing activities, net
$
(48.000)
Net cash flows from investing activities
$ (3.915.000)
Change in bank payments outstanding
Proceeds from short-term borrowings
Proceeds from issuance of long-term debt
Repayments of long-term debt
$
(800.000)
Minimum tax withholdings on stock-based awards
Tax withholdings on stock-based awards
$
(363.000)
Repurchases of common stock
$
(439.000)
Cash dividend payments
$ (1.498.000)
Dividend to noncontrolling interest
$
(208.000)
Acquisition of noncontrolling interest
$
(842.000)
Other financing activities, net
$
(133.000)
Net cash flows from financing activities
$ (4.283.000)
Effect of exchange rate changes on cash & cash equivalents
$
(249.000)
Net change in cash & cash equivalents
$ (1.055.000)
Cash & cash equivalents beginning of year
$ 11.258.000
Cash & cash equivalents end of year
$ 10.203.000
Cash paid during the year for interest
$
145.000
Cash paid during the year for income taxes, net
$
1.940.000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
08/29/2021
USD
Not Qualified
Yes
Thousands
5.079.000
1.781.000
286.000
665.000
85.000
59.000
(1.892.000)
1.838.000
1.057.000
8.958.000
(1.331.000)
1.446.000
(3.588.000)
(62.000)
(3.535.000)
188.000
41.000
(94.000)
(312.000)
(496.000)
(5.748.000)
(67.000)
(6.488.000)
46.000
(1.019.000)
12.277.000
11.258.000
149.000
1.527.000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
08/30/2020
USD
Not Qualified
Yes
Thousands
4.059.000
1.645.000
194.000
619.000
42.000
104.000
(791.000)
2.261.000
728.000
8.861.000
(1.626.000)
1.678.000
(2.810.000)
(1.163.000)
30.000
(3.891.000)
137.000
3.992.000
(3.200.000)
(330.000)
(196.000)
(1.479.000)
(71.000)
(1.147.000)
70.000
3.893.000
8.384.000
12.277.000
124.000
1.052.000
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Costco Wholesale Corp (NMS: COST)
Company Financials
Income Statement
Exchange rate used is that of the Year End reported
date
As Reported Annual Income Statement
Report Date
08/28/2022
Currency
USD
Audit Status
Not Qualified
Consolidated
Yes
Scale
Thousands
Net sales
100.00%
Membership fees
1.90%
Total revenue
101.90%
Merchandise costs
89.52%
Selling, general & administrative expenses
8.88%
Preopening expenses
NM
Operating income
3.50%
Interest expense
0.07%
Interest income
0.03%
Foreign-currency transactions gains (losses), net
0.05%
Other interest income & other income, net
0.02%
Interest income & other income, net
0.09%
Income before income taxes – domestic
2.59%
Income before income taxes – foreign
0.93%
Income before income taxes
3.52%
Current federal provison (benefit) for income taxes
0.36%
Deferred federal provison (benefit) for income taxes
-0.02%
Total federal provison (benefit) for income taxes
0.34%
Current state provison (benefit) for income taxes
0.15%
Deferred state provison (benefit) for income taxes
0.00%
Total state provison (benefit) for income taxes
0.15%
Current foreign provison (benefit) for income taxes
0.38%
Deferred foreign provison (benefit) for income taxes
-0.01%
Total foreign provison (benefit) for income taxes
0.37%
Provision for income taxes
0.86%
Net income (loss) including noncontrolling interests
2.66%
Net loss (income) attributable to noncontrolling interests
-0.03%
Net income attributable to Costco Wholesale Corp
2.62%
Weighted average shares outstanding – basic
Weighted average shares outstanding – diluted
Year end shares outstanding
Net income (loss) per common share – basic
Net income (loss) per common share – diluted
Cash dividends declared per common share
Number of full time employees
Number of part time employees
Total number of employees
Number of common stockholders
Foreign currency translation adjustments
08/29/2021
USD
Not Qualified
Yes
Thousands
100.00%
2.02%
102.02%
88.87%
9.61%
0.04%
3.49%
0.09%
0.02%
0.03%
0.02%
0.07%
2.57%
0.91%
3.48%
0.37%
0.04%
0.42%
0.14%
0.01%
0.14%
0.29%
-0.02%
0.27%
0.83%
2.64%
-0.04%
2.61%
08/30/2020
USD
Not Qualified
Yes
Thousands
100.00%
2.17%
102.17%
88.80%
10.01%
0.03%
3.33%
0.10%
0.05%
0.00%
0.00%
0.06%
2.58%
0.71%
3.29%
0.38%
0.05%
0.42%
0.14%
0.00%
0.15%
0.23%
0.00%
0.23%
0.80%
2.49%
-0.03%
2.45%
Balance Sheet
Exchange rate used is that of the Year End reported
date
As Reported Annual Balance Sheet
Report Date
Currency
Audit Status
Consolidated
Scale
Cash & cash equivalents
Short-term investments
Receivables, net
Merchandise inventories – U.S.
Merchandise inventories – Canada
Merchandise inventories – other international
Merchandise inventories
Other current assets
Total current assets
Land
Buildings & improvements
Equipment & fixtures
Construction in progress
Property & equipment, gross
Less accumulated depreciation & amortization
Property & equipment, net
Operating lease right-of-use assets
Other long-term assets
Total assets
Accounts payable
Current portion long-term debt
Accrued salaries & benefits
Accrued member rewards
Deferred membership fees
Other current liabilities
Total current liabilities
Senior notes
Other long-term debt
Total long-term debt
Less unamortized debt discounts & issuance costs
Less: current portion
Long-term debt, excluding current portion
Long-term operating lease liabilities
Other long-term liabilities
Total liabilities
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total Costco Wholesale Corp stockholders’ equity
Noncontrolling interests
Total equity
Cash Flows
Exchange rate used is that of the Year End reported
date
08/28/2022
USD
Not Qualified
Yes
Thousands
15.90%
1.32%
3.49%
20.51%
3.06%
4.33%
27.91%
2.34%
50.96%
12.40%
31.36%
16.01%
2.47%
62.23%
23.82%
38.41%
4.32%
6.31%
100.00%
27.82%
0.11%
6.83%
2.98%
3.39%
8.74%
49.87%
9.35%
0.92%
10.27%
-0.05%
0.11%
10.11%
3.87%
3.98%
67.82%
0.00%
10.73%
-2.85%
24.29%
32.17%
0.01%
32.18%
08/29/2021
USD
Not Qualified
Yes
Thousands
19.00%
1.55%
3.04%
17.29%
2.46%
4.24%
23.98%
2.21%
49.78%
12.67%
32.29%
16.04%
2.54%
63.54%
23.90%
39.64%
4.88%
5.70%
100.00%
27.47%
1.35%
6.90%
2.82%
3.45%
7.70%
49.67%
11.47%
1.23%
12.71%
-0.07%
1.35%
11.29%
4.46%
4.07%
69.50%
0.01%
11.86%
-1.92%
19.68%
29.63%
0.87%
30.50%
08/30/2020
USD
Not Qualified
Yes
Thousands
22.10%
1.85%
2.79%
15.97%
2.36%
3.71%
22.04%
1.84%
50.62%
12.05%
32.37%
15.75%
2.30%
62.46%
23.21%
39.25%
5.02%
5.11%
100.00%
25.51%
0.17%
6.49%
2.51%
3.33%
6.71%
44.72%
12.24%
1.54%
13.78%
-0.09%
0.17%
13.53%
4.60%
3.48%
66.33%
0.01%
12.06%
-2.33%
23.18%
32.91%
0.76%
33.67%
As Reported Annual Cash Flow
Report Date
08/28/2022
Currency
USD
Audit Status
Not Qualified
Consolidated
Yes
Scale
Thousands
Net income (loss) including noncontrolling interests
Depreciation & amortization
Non-cash lease expense
Stock-based compensation
Other non-cash operating activities, net
Deferred income taxes
Merchandise inventories
Accounts payable
Other operating assets & liabilities, net
Net cash flows from operating activities
Purchases of short-term investments
Maturities & sales of short-term investments
Additions to property & equipment
Acquisitions
Other investing activities, net
Net cash flows from investing activities
Change in bank payments outstanding
Proceeds from short-term borrowings
Proceeds from issuance of long-term debt
Repayments of long-term debt
Minimum tax withholdings on stock-based awards
Tax withholdings on stock-based awards
Repurchases of common stock
Cash dividend payments
Dividend to noncontrolling interest
Acquisition of noncontrolling interest
Other financing activities, net
Net cash flows from financing activities
Effect of exchange rate changes on cash & cash equivalents
Net change in cash & cash equivalents
Cash & cash equivalents beginning of year
Cash & cash equivalents end of year
Cash paid during the year for interest
Cash paid during the year for income taxes, net
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Costco Wholesale Corp (NMS: COST)
Exchange rate used is that of the Year End reported date
Profitability Ratios
ROA % (Net)
ROE % (Net)
ROI % (Operating)
EBITDA Margin %
Calculated Tax Rate %
Revenue per Employee
08/28/2022
9.5
30.68
29.91
4.32
24.55
748610
08/29/2021
8.75
28.01
26.41
4.36
23.97
682178
08/30/2020
7.95
23.94
22.73
4.25
24.37
612524
Liquidity Ratios
Quick Ratio
Current Ratio
Net Current Assets % TA
08/28/2022
0.42
1.02
1.09
08/29/2021
0.47
1
0.11
08/30/2020
0.6
1.13
5.9
Debt Management
LT Debt to Equity
Total Debt to Equity
Interest Coverage
08/28/2022
0.31
0.32
132.08
08/29/2021
0.38
0.43
79.86
08/30/2020
0.41
0.42
72.47
Asset Management
Total Asset Turnover
Receivables Turnover
Inventory Turnover
Accounts Payable Turnover
Accrued Expenses Turnover
Property Plant & Equip Turnover
Cash & Equivalents Turnover
08/28/2022
3.69
112.55
12.41
13.34
37.76
9.46
21.21
08/29/2021
3.42
117.19
12.9
12.9
36.52
8.67
16.7
08/30/2020
3.31
108.41
12.26
12.94
35.75
7.83
16.19
Per Share
Cash Flow per Share
Book Value per Share
08/28/2022
16.71
46.63
08/29/2021
20.27
39.75
08/30/2020
20.09
41.44
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Costco Wholesale Corp (NMS: COST)
* all results are stated in US
Dollars
Target Country (United States)
Peer Grouping by:
Peer Scope:
Company Name
NAIC
country
ROA %
(Net) latest
ROE %
Gross Net Profit
(Net) – Margin % Margin %
latest
– latest
– latest
Quick
Ratio latest
Current LT Debt
Ratio – to Equity
latest
– latest
Total Interest
Total Inventory
Debt to Coverag
Asset Turnover
Equity – e – latest Turnover
– latest
latest
– latest
Albertsons Companies Inc
Andersons Inc
BJ’s Wholesale Club Holdings Inc
Costco Wholesale Corp
Dollar General Corp
Dollar Tree Inc
Sunoco LP
Target Corp
Walmart Inc
5.59
2.86
8.56
9.50
8.58
7.24
7.51
5.20
4.79
50.93
11.54
60.72
30.68
40.27
19.67
54.19
23.17
14.60
28.02
3.95
17.77
12.15
31.23
31.54
5.36
24.64
24.14
1.95
0.76
2.66
2.57
6.38
5.70
1.85
2.55
1.91
0.13
0.54
0.10
0.42
0.06
0.15
0.69
0.20
0.18
0.74
1.37
0.67
1.02
1.29
1.51
1.41
0.92
0.82
4.73
0.41
0.45
0.31
1.26
0.39
3.91
1.43
0.51
5.59
0.73
0.84
0.32
1.26
0.39
3.91
1.44
0.58
5.34
3.83
15.55
132.08
15.75
17.85
3.65
8.05
10.90
2.87
3.78
3.22
3.69
1.34
1.27
4.07
2.04
2.50
12.04
9.39
12.12
12.41
4.21
3.95
35.94
6
8.20
Average
6.65
33.97
19.87
2.93
0.27
1.08
1.49
1.67
23.67
2.75
11.58
1
Financial Statement Analysis: Costco Wholesale Corp
Jennifer Cabrera
The University of Arizona Global Campus
BUS401 – Principles of Finance
Dr. Kevin Righter
July 24, 2023
2
Financial Statement Analysis: Costco Wholesale Corp
Part 1: Overview
Costco Wholesale Corp is a multinational retailer headquartered in Issaquah,
Washington. Some of Costco’s international markets include Canada, UK, France, Japan,
Australia, and Korea. Costco deals a variety of products, including foods, groceries, appliances,
electronics, and sporting goods (Yahoo Finance, 2023). The company’s market positioning is
offering customers products at low prices. To achieve its low-cost strategy, the company has
organized its operations to deliver high level of efficiency. Part of this efficiency involves
directly purchasing merchandise from manufacturers and selling it directly to customers (Costco,
2023). This strategy eliminates the costs associated with many distribution channels whose
overall effect is high product prices. Its current market price per share is $563.93 (Yahoo
Finance, 2023).
Part 2: Income Statements
Costco’s income statement shows a company with commendable financial health and
promising growth prospects. First, this observation is clear from the consistently growing
revenues; $166.7 billion in 2020, $195.9 billion in 2021, and $226.9 billion in 2022. Secondly,
Costco’s good financial health is affirmed by a consistently growing operating income from
2020 to 2023. In 2020, 2021, and 2022, the company realized operating incomes of $5.4 billion,
$6.7 billion, and $7.7 billion, respectively (Costco, 2022). Consistent growth in revenue and
operating income depicts a company that is able to efficiently utilize its resources to generate
income (Shim, 2022). This position is solidified by similarly growing net income in the same
accounting period. In 2020, 2021, and 2022, Costco’s net income grew from $4,002 billion in
3
2020 to $5.007 in 2021 and to $5.844 billion in 2022 (Costco, 2022). Therefore, Costco has had
a strong income statement in three accounting years.
Part 3: Common Size Income Statement
Costco operates at low margins because of its low-cost retail strategy. Gross margin is the
percentage of a company’s revenues remaining after subtracting the costs of goods sold. In 2020,
2021, and 2022, the company registered gross margins of $166.7 billion, $195.9 billion, and
$226.9 billion respectively (Costco, 2022). Operating margin indicates the percentage of profit
made by a company for every dollar of gross margin. In 2020, 2021, and 2022, Costco’s
operating margins were 3.3%, 3.4%, and 3.4% respectively (Costco, 2022). The last margin is
the net profit margin, which is the proportion of net income per dollar of revenue. In 2020, 2021,
and 2022, Costco recorded net profit margins of 2.4%, 2.6%, and 2.6% (Costco, 2022).
Therefore, Costco has had positive but low margins in the last three years.
Part 4: Balance Sheets
Costco’s balance sheet also indicates a healthy company, because assets and equity that
exceed liabilities. In 2020, 2021, and 2022, total assets grew from $55.5 billion, $59.2 billion to
$64.1 billion, while current assets grew from $28.1 billion and $29.5 billion to $32.6 billion,
respectively (Costco, 2022). On the other hand, in a similar period, its total current liabilities
grew from $24.8 billion to $29.4 billion and then to $31.9 billion. Total long-term debt dropped
from $7.6 billion to $7.5 billion and then to $6.5 billion between 2020 and 2022 (Costco, 2022).
Lastly, Costco’s total shareholders’ equity grew from $18.7 billion in 2020 to $20.6 billion in
2022 (Costco, 2022). These trends indicate Costco’s more reliance on its resources and equity as
than debts to finance its operations.
4
Part 5: Common Size Balance Sheets
Trends in the common size balance sheet affirm Costco’s increasing reliance on non-debt
financing. The growth of total current assets as a percentage of total assets from 50.62% in 2020
to 50.96% in 2022 indicates the company’s growth in liquid assets essential for financing daily
operations (Costco, 2022). The company’s long-term debt as a percentage of total assets fell
from 13.78% in 2020 to 10.27% in 2022, indicating declining reliance on debt. Further, the
decrease in total shareholder’s equity as a percentage of total assets from 33.67% in 2020 to
32.18 in 2022, indicates the company’s increasing reliance on its assets for financing as against
equity (Costco, 2022). Lastly, the increase in total current liabilities as a percentage of total
assets from 44.72% in 2020 to 49.87% in 2022 indicates that the company has significant shortterm obligations to settle using current assets (Costco, 2022). Overall, Costco’s common size
balance sheet shows a trend of increasing adoption of non-debt financing, which a healthy
approach.
Part 6: Cash flow
Calculation of simple cash flow
($billion)
Free cash flow = Net
income
depreciation/amortizationchange in working
capital-capital
expenditures
Free cash flow
2022
5.844+1.9-([32.69631.998] + [64.16632.696)
2021
5.007+ 1.781([29.505- 29.441] +
[ 59.268+ 29.505])
2020
4,002+ 1,645-([
28,120- 24,844] + [
55,556- 28,120])
-24.338
-23.039
-25.065
From this calculation, Costco’s simple cash flow remained negative for three years. This
indicates the company’s lack of cash in hand to run its operations, which signifies questionable
5
financial health. However, the stability of the company’s positive net operating cash flows
$8.861 billion in 2020 and $7.392 in 2022 (Costco’s 2022) alleviates this concern. The positive
net cash flows shows depicts a healthy company with adequate cash in hand to run its daily
operations.
Part 7: Financial Analysis Conclusion
Financial fact
Revenue
Operating income
Net income
Gross margin
Operating income margin
Net profit margin
Total assets
Total current liabilities
Long-term debt
Total shareholders’ equity
Total current assets as a percent (%) of total assets
Total current liabilities as a percent (%) of total assets
Long-term debt as percent (%) of total assets
Total shareholders’ equity as a percent (%) of total assets
Simple cash flow
Net operating cash flow
Overall financial strength
Strength or Weakness
Strength
Strength
Strength
Strength
Strength
Strength
Strength
Weakness
Strength
Strength
Strength
Weakness
Strength
Strength
Weakness
Strength
Strong
Costco is generally financially strong the impressive financial performance in has
indicated in most of its financial figures in the last three years. Particularly, except for the
increase in current liabilities as a percentage of total assets and negative simple cash flows,
Costco excels in all other measures. Costco’s positive performance measures outweigh poor
performance indicators in the two areas, hence the company’s overall financial performance can
be categorized as strong.
6
References
Costco. (2022). Costco Wholesale Corp (NMS: COST)
Costco. (2023). Annual report
2022. https://s201.q4cdn.com/287523651/files/doc_financials/2022/ar/Costco-2022Annual-Report.pdf
Shim, J. K. (2022). Financial management. Barrons Educational Series.
Yahoo Finance. (2023). Costco Wholesale Corporation
(COST). https://finance.yahoo.com/quote/COST/profile?p=COST
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