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# Financial Ratio Analysis of COSTCO Company

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Financial ratio analysis is used in financial statements to compare different line items to draw a valid conclusion about financial performance, leverage liquidity as well as asset usage of a business (Delen, Kuzey & Uyar, 2013). Investors and management primarily use them. Investors use this evaluation method to see whether the firm is a good venture whereby they compare financial ratios between industries and companies to determine the best investment. On the other hand, management uses financial ratio analysis to get to know how well their firm is performing to analyze as well as evaluate areas that need improvement in the firm.

Liquidity ratios

These are ratios used in the balance sheet to compare the line items. Additionally, they measure the capability of a business venture to timely pay its bills. Generally, they deal with short-term financing and debts and enables companies and organizations to convert assets into money as well as pay off interest.

Asset Turnover Ratios

This is the ratio between the worth of a company’s asset compared to the value of its sales or revenues and is calculated annually by use of either the fiscal or calendar year. The higher the asset turnover ratio, the better the company is performing and vice versa.

Quick Ratios

This is a liquidity ratio that measures as well as determines the capability of an organization or film to meet or pay its short-term financial liabilities. It is also referred to as acid test ratio and is computed as; (inventory-current assets)/ current liabilities in an organization.

Profitability Ratios

These are classes of financial metrics used to measure and determine the ability of a business venture to create earnings (Delen, Kuzey & Uyar, 2013). They are used primarily by specific peoples such as investors and analyst to evaluate the capability of a firm to generate profits relative to revenue, operating cost, and balance sheet asset as well as shareholder equity during a specific duration. Probability ratios can be divided into two, margin ratios which entail the ability to convert salsas into profit by a company and return ratios which represents the potential of the company to generate returns to its shareholders.

Equity Ratios

This is the leverage ratio that indicates the relative portion of equity the company’s uses to finance its assets. It incorporates all the resources a company has funded by its earnings together with contributions from its equity participants. Equity ratio is calculated as the stakeholder’s equity, divided by total assets.

Which do you think is/are most important to a company in making financial forecasts?

I think profitability ratios is the most important to a company in making financial forecasts. First, profitability ratios will allow a firm to keep track of all profits that it gets and in that regard, it will be able to estimate financial requirements as well as capital required for a specific project in future enabling the management to make a sound decision (Delen, Kuzey & Uyar, 2013). Moreover, it will ascertain forecasting of business finances including current, and potential revenues and expenses are efficient that assist in ensuring the organization runs smoothly.

Information on the financial ratio of COSTCO

The company is at 25.13% with their return on equity while the industry average is at 42.30%. Calculating the return on equity based on the DuPont decomposition, it equated to 26.89% which is a little better than their regular ROE but there is always room for improvement and company can do so (K.Smith, Betts, & Smith, 2018). They started with 7.0 current ratio in 2013 and increased substantially in 2016 but finally made it back down a year later to 4.60. It looks like it will be a little more consistent for the next few years.

Profitability Ratios Calculations

The current ratio is calculated to identify the liquidity ratio of the company which in this case is the Ocado Group Plc. The current ratio is computed using the formula:

(Gross profit/ turnover) x 100= Gross Profit Margin

= (68,414,765/109,150,639) x 100

=63%

COSTCO Company is making a significant amount of revenue as the difference between its sales, and gross income is smaller.

Net Profit Margin = (Net profit /Revenue) 100

=16,621,753/109,150,639

=15%

Current ratio = Current asset/Current liability

From the case current asset is \$ 9, 574, 000 while the current liability for the same year is \$ 4, 314, 500. So the current ratio is 9, 574, 000/4, 314, 500 = 2.219 times.

Profitability:

Profitability is crucial as it determines how the company is remunerative based on the asset value invested in the business. Return on asset indicates the profitability of the company associated with the company’s total assets and is always expressed as a percentage (Delen, Kuzey & Uyar, 2013).  .The ratios below are useful when determining the profitability on assets:

(Current asset- inventories)/current liabilities= Quick ratio

= (110,328,582-166,284,475)/44,641,482

=2.10

The quick ratio indicates how COSTCO can cover for the costs of its financial liabilities in the midst of a standoff as it is above 1.0.

Return on Equity (ROE) = (net profits/Equity) x 100

For the company, the operating profit was \$ 1, 434, 000 and the total asset for the same period was \$ 13,717,000.

ROE= (1, 434, 000/13,717,000) x 100 = 10.5%

Gearing ratio = (non-current liabilities/ equity+ non-current liabilities) x 100

=20,009,497/44,641,482

=45%

COSTCO Company has a good size of cash and the goods to be converted in liquid form to pay for the current liabilities that may be facing it in the conquest of its market frontiers (K.Smith, Betts, & Smith, 2018).

Operating Profit Margin Ratio = (operating profit/revenue) x 100.

This indicates how the firm controls the cost of goods sold as well as other expenses that directly relate to sales and is calculated as;

(Current operating profit /current sales)/ Current operating profit x100.

For COSTICO Company the operating profit margin is \$ 1, 434, 000/ \$ 28, 911, 500 = 0.0496 x 100 = 4.96%.

Percentage rate of return on assets = (Earnings before taxes/ Total assets) x 100

Debt Ratio indicates the percentage of assets financed by debts relative to the company’s total assets and is calculated by the formulae; (Earnings before taxes/ total assets) x 100 (K.Smith, Betts, & Smith, 2018). The Debt Ratio for COSTICO Company is \$ 8, 571,500/\$ 13, 717,000 = 62.5%.

(Operating profit/capital employed) x 100= Return on capital employed

This can be measured by reflecting the net profit of the firm and owner’s equity and is expressed as a percentage (K.Smith, Betts, & Smith, 2018). The formula is (operating profit/capital employed) x 100. The return rate for the company in the case is (\$ 531, 500/ \$ 5, 14, 500) x 100 = 10.33%.

References

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.

Smith, K. T., Betts, T. K., & Smith, L. M. (2018). Financial analysis of companies concerned about human rights. International Journal of Business Excellence, 14(3), 360-379.

August 18, 2023
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