Costco B

1. The five factors tied directly to the accounts of income statement and balance sheet. Hence it is
a good measure or predictor of future performance.
2. Other factors should include the decreased store performance due to the cannibalization of
existing store. Sales made online should also be considered since it is a threat to the current
market. Corporate overhead should be considered since this is the largest value in the income
statement.
3. Assumptions made are
a. Store openings consistent
b. Sales per store increase
c. Member per store consistent
d. Revenue booked per member increase
e. Cost of goods sold low but consistent
f. SG&A consistent
g. Pre-opening and interest Expense consistent
4. It shows a steady improvement although it decreases slightly. It is expected to be profitable in
the future.
5. The rate of expansion will affect the income statement and balance sheet. The balance sheet
will be directly affected since expansion involves investment in assets and additional investment
from owners and debt. The growth rate to be reliable should be less than the GDP because the
company cannot grow more compared to the countries GDP.
6. The use of equity method means that the company does not consolidate its assets and liabilities.
7. Projections are conservative because the forecast for revenue, earnings and EPS are below the
expected. ROE increase inconsistently because they are assuming a mean reversion. Mean
reversion meaning it will divert from the usual trend.
8. The decision should be to sell because they will not enjoy the 19 percent compounded annual
return.
Costco A

Common Size Statements

Company is operating with low markups

SG&A should be lowered to improve profit
Membership are substantial
The company did not sustain a loss
Increase in SG&A decreases the profit margin
The accounting policy for recognizing membership fees should be reviewed
Their assets are more of cash, inventory and PP&E
Current Assets are a big percentage of total assets
They have a low level of debt
Current assets became lower than current liabilities
Current assets decline as a percent of total assets
Debt decreases as percent of total capitalization

Sustainable growth model

Costco should maintain their earnings from 14 to 18 percent.

ROE the ROE is dependent on the equity base to use. It maybe average or ending
Dividend Payout Dividend payout decreases sustainable growth rate. This is because cash
would be used to payout dividends instead of reinvestment
ROA shows the same trend as ROE
Financial Leverage steadily decreasing
Asset Turnover gradually fallen
Net Income same trend as ROE

Benchmark Ratios

Operating Margin Walmart is the best compared to BJ and Costco

Net Margin Walmart is the best compared to BJ and Costco
Current Ratio Wholesale club usually have a normal current ratio therefore it is expected
Inventory Turnover Costco had a better inventory turnover
Average payables period Sears gave a different value than others

Conclusion :

It should be useful to analyze the company against the other company within the industry not only
within the company itself thru its performance in the previous period.