Costco Case Study Essay
• Costco’s business model was to generate high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories. Management believed that rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities, enabled the company to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.
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5. How well is Costco performing from a financial perspective? Do some number crunching using the data in Case Exhibit 1 to support your answer. Use the financial ratios presented in table 5.1 of chapter 5 to diagnose Costco’s financial performance.
• Upon reviewing Exhibit 1, it looks like Costco is maintaining every year. They have not had any major gains or suffered any major losses.
Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Stockholder’s Equity
Current Ratio Working Capital
2000 .02 .03 .02 15% 2.5 5230
2002 .02 .03 .02 12% 2.6 7170
2004 .02 .03 .02 11.5% 2.4 8923
2005 .02 .03 .02 12% 2.4 9753
2006 .02 .03 .02 12% 2.2 9676
The company seems to maintain a constant financial performance from year to year. Working capital has increased which shows that the company has more internal funds available to pay its current liabilities on a timely basis and finance inventory expansion, additional accounts receivable, and a larger base of operations without resorting to borrowing or raising additional equity capital. The current ration also shows that Costco is able to pay current liabilities by using assets that can be converted to cash in the near term. They are well above the 1.0 ratio. The return on stockholder’s