Cash Flow Analysis of Costco Wholesale Corporation
Question:
Discuss about the Financial Position Of Costco Wholesale Corporation
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The report briefs about the financial position and the prediction about the financial position of Costco Wholesale Corporation. Financial analysis and prediction about financial position of an organization is crucial methods which makes it easier for the management of the company to identify the current performance of the company as well as the future changes in the company. In the report, cash flow of the company has been analyzed firstly to identify the performance of the company. Further, the ratio analysis study has been done to evaluate the different levels of the company and lastly, financial forecasting has been done on the future performance and the position of Costco Wholesale Corporation.
Cash flow analysis is an examination which is done on the cash outflows and cash inflows of a company in a particular period. The cash flow analysis starts with the initial cash balance and generates the ending cash flow of the company. The evaluation on the statement of cash flows of Costco Wholesale Corporation has been done.
The cash flow statement of the company expresses that the operating cash flow of the company in 2017 is $ 6,726 million which has been enhanced from $ 3,292 million and $ 4,285 million in 2016 and 2015. The operating cash flow of the company has been enhanced due to changes in operating assets and liabilities (Home, 2018). The current operating cash flow position of the company is quite better and briefs about the better cash position of the company.
In addition, investing cash flows of Costco Wholesale Corporation has been done. The investing cash flow of the company in 2017 is $ -2300 million which has been enhanced from -$ 2,649 million and -$ 2,480 million in 2016 and 2015 (Annual Report, 2017). The investing cash flow of the company has been decreased a bit due to little changes in investing activities of the company. The current investing cash flow position of the company is not at all good and briefs that it is required for the company to invest less money on various fixed assets.
Lastly, the study has been conducted on financing cash flows of the company. Financing cash flow of the company in 2017 is -$ 3,218 million which has been lowered from -$ 2,419 million and -$ 2,324 million in 2016 and 2015. The financing cash flow of the company has been decreased due to high dividends and other financing activities of the company (Brown, 2012). The current financing cash flow position of the company is not good and explains that it is required for the company to manage the financial expenditure.
Cash flows of the company briefs that the overall cash position of the company is quite lower from the last 2 year’s position. The changes have occurred into the cash flow of the company due to investing activities and the financing activities. The free cash flow of the company has been lower (Madhura, 2011). Though, the cash outflow of the company has been higher due to dividend amount which has been given to the shareholders of the company. The accounts payable amount has not affected the cash outflow of the company. Though, the current cash flow of the company has been lower due to investing and financial activities of the company which are required to be managed by the company in a better way.
Ratio Analysis of Costco Wholesale Corporation
Ratio analysis is a financial analysis study which is done on Costco Wholesale Corporation to evaluate the financial performance, position and changes in the company. Ratio analysis evaluates the financial position and performance of an organization on various bases such as liquidity position, profitability position, capital position, debt position, solvency position etc. (Brooks, 2015). The study of ratio analysis of the company is as follows:
Liquidity position of the company has been evaluated on the basis of various ratios such as current ratio and quick ratio. Current ratio calculations and the quick ratio of the company are 0.99 and 0.43 in current year which briefs that the short term debt payment capacity of the company is not far better and it is required for the company to enhance the level of the current assets.
Asset management position of the company has been evaluated further on the basis of various ratios such as asset turnover ratio, inventory turnover ratio and debtor’s turnover ratio. Asset turnover ratio, inventory turnover ratio and debtor’s turnover ratio of the company are 3.54, 32.08 days and 4.05 days in current year which briefs that the position of the company is quite efficient (Brigham and Houston, 2012). Though, the comapny should reduce the level of inventory turnover days.
Debt utilization:
Debt utilization position of the company has been evaluated further to evaluate the debts and equity position of the company as well as the cost and the risk level of the company. Debt equity ratio, debt ratio, equity ratio, debt coverage ratio of the company are 2.37, 0.70, 67.30 and 1.20 in current year which briefs that the position of the company is quite better in terms of cost and the risk.
Lastly, the profitability position of the company has been evaluated on the basis of various ratios such as return on equity, return on assets, profit margin, and gross profit margin etc. the profitability ratio calculations of company briefs that the financial position of the company is quite better and it is suggested to the company to enhance the level.
- Sales forecast:
Sales forecast has been done further to evaluate the future of the company. The current sales position of the company and historical trends of the company briefs that the sales position of the company could be enhanced by 5.43% (Appendix). The management discussion and analysis of financial condition brief about sales position of the company which is not better and briefs about the negative changes in the ticket selling of the company (Annual Report, 2018). Thus, it has been found that 10% is not the reasonable estimate of sales growth of the company.
Though, if the company operates at its full capacity and achieves the sales growth target of the company than the additional funds needed of the company would be $ 1,230.77.
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Additional funds needed = required asset increase – spontaneous liabilities increase – increase in retained earnings |
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AFN= (0.28* ΔS) – (0.0509* ΔS) -(0.65*S1*0.0189) |
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AFN= (0.28* 12902.5) – (0.0509* 12902.5) -(0.65*141928*0.0189) |
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AFN = 3634.7-657.3-1746.63 |
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AFN= |
1230.77 |
(Brigham and Ehrhardt, 2013)
The formula describes that for increasing the sales by $ 12,902.5 million, Costco Wholesale should enhance the assets by $ 3634.7 million. Further, the $ 657.3 million would come from increment in spontaneous liabilities and $ 1763.63 would be enhanced by the company through retained earnings. It briefs that the rest $ 1230.77 million has to be raised by the company through external sources (Appendix).
- Ratios:
Ratio calculations of the company are as follows:
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Ratio Calculations |
2017 |
2016 |
2015 |
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Profitability Ratios: |
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Return on Equity |
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Profit avail to owners / |
2,679 |
2,350 |
2,377 |
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Average Equity |
10,778 |
12,079 |
10,617 |
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Answer: |
% |
24.86% |
19.46% |
22.39% |
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Return on Assets: |
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Net profit (loss) / |
2,679 |
2,350 |
2,377 |
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Average total assets |
% |
36,347 |
33,163 |
33,017 |
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Answer: |
7.37% |
7.09% |
7.20% |
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Profit Margin |
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Net profit (loss) / |
2,679 |
2,350 |
2,377 |
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Sales Revenue (note used operating revenue) |
1,29,025 |
1,18,719 |
1,16,199 |
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Answer: |
% |
2.08% |
1.98% |
2.05% |
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Gross Profit Margin |
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Gross profit / |
17,143 |
15,818 |
15,134 |
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Sales Revenue (note used operating revenue) |
1,29,025 |
1,18,719 |
1,16,199 |
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|
Answer: |
0.13 |
0.13 |
0.13 |
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Cash Flow to Sales Ratio |
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Cash Flow from Operating Activities/ |
6,726 |
6,726 |
6,726 |
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Sales Revenue (note used operating revenue) |
% |
1,29,025 |
1,18,719 |
1,16,199 |
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Answer: |
5.21% |
5.67% |
5.79% |
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Asset Efficiency Ratios |
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Asset Turnover Ratio |
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Sales Revenue / (note used operating revenue) |
1,29,025 |
1,18,719 |
1,16,199 |
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Average Total Assets |
36,347 |
33,163 |
33,017 |
|
|
Answer: |
3.5498 |
3.5799 |
3.5194 |
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Inventory Turnover (days) |
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Average Inventory / |
9,834 |
8,969 |
8,908 |
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Cost of Sales |
# days |
1,11,882 |
1,02,901 |
1,01,065 |
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Answer: (note the above needs to be x 365) |
32.08 |
31.81 |
32.17 |
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Inventory Turnover (times p.a) |
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Cost of Sales / |
1,11,882 |
1,02,901 |
1,01,065 |
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Average Inventory |
times p.a |
9,834 |
8,969 |
8,908 |
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Answer |
11.38 |
11.47 |
11.35 |
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Receivables Turnover (days) |
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Average trade debtors / |
1,432 |
1,252 |
1,224 |
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Sales revenue (note used operating revenue) |
# days |
1,29,025 |
1,18,719 |
1,16,199 |
|
Answer: (note the above needs to be x 365) |
4.05 |
3.85 |
3.84 |
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Receivables Turnover (times p.a) |
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Sales Revenue / (note used operating revenue) |
1,29,025 |
1,18,719 |
1,16,199 |
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Average Trade Debtors |
1,432 |
1,252 |
1,224 |
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|
Answer |
times p.a |
90.10 |
94.82 |
94.93 |
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Liquidity Ratios |
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Current Ratio |
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Current Assets / |
17,317.00 |
15,218.00 |
16,779.00 |
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|
Current liabilities |
17,495.00 |
15,575.00 |
16,539.00 |
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Answer: |
0.99 |
0.98 |
1.01 |
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Quick Asset Ratio |
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Current Assets – Inventory / |
7,483 |
6,249 |
7,871 |
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Current Liabilities |
17,495 |
15,575 |
16,539 |
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Answer: |
0.43 |
0.40 |
0.48 |
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Cash Flow Ratio |
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Net Cash Flows form Operating Activities / |
6,726 |
6,726 |
6,726 |
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Current Liabilities |
17,495 |
15,575 |
16,539 |
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Answer: |
0.3845 |
0.4318 |
0.4067 |
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Debt Utilization ratios |
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Debt to Equity ratio |
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total liabilities / |
25,569 |
21,084 |
22,400 |
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Total Equity |
10,778 |
12,079 |
10,617 |
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Answer: |
% |
2.372 |
1.746 |
2.110 |
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Debt Ratio (to assets) |
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Total Liabilities / |
25,569 |
21,084 |
22,400 |
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Total assets |
36,347 |
33,163 |
33,017 |
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Answer |
% |
0.703 |
0.636 |
0.678 |
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Equity Ratio |
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Total Equity / |
10,778 |
12,079 |
10,617 |
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Total Assets |
36,347 |
33,163 |
33,017 |
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|
Answer: |
% |
0.297 |
0.364 |
0.322 |
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Interest Coverage Ratio |
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EBIT / |
4,173.00 |
3,752.00 |
3,728.00 |
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Net Finance Costs (used net interest expense) |
62 |
80 |
104 |
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Answer: |
times p.a |
67.306 |
46.900 |
35.846 |
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Debt Coverage Ratio |
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Non Current Liabilities / |
8,074 |
5,509 |
5,861 |
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Net Cash Flow from Operating Activities |
6,726.00 |
6,726.00 |
6,726.00 |
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Answer: |
times p.a |
1.20 |
0.82 |
0.87 |
(Brigham and Daves, 2012)
Conclusion:
To conclude, the financial position of Costco Wholesale is quite better. The company is performing well and if the company wants to raise the funds then the $ 1230.77 million has to be raised by the company through external sources. The study briefs that the financial position and performance of the company is good and explains that the company is a good option for the purpose of investment.
References:
Annual Report. 2017. Costco Wholesale Corporation. [Online]. Available at: https://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-sec [Accessed as on 10th April 2018].
Brigham, E. and Daves, P., 2012. Intermediate financial management. Nelson Education.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.
Brooks, R., 2015. Financial management: core concepts. Pearson.
Brown, R., 2012. Analysis of investments & management of portfolios. Pearson Higher Ed.
Home. 2017. Costco Wholesale Corporation. [Online]. Available at: https://www.costco.com/ [Accessed as on 10th April 2018].
Madura, J., 2011. International financial management. Cengage Learning.
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