Financial Statement Analysis
Introduction:
This project is a financial statement analysis of Costco’s 2023 annual statement. The source data was extracted from the annual statement found on Costco’s investor relations page. Costco’s Form 10-k, which is a detailed version of the annual statement can also be found on the SEC website.
Problems and Explanation:
The first challenge in this exercise was to locate and extract the data from Costco’s most recent annual statement. Fortunately for me, finding the data wasn’t too difficult. To transfer the data from the online annual statement to Excel, I used the “Get data from web” feature in Excel to reproduce the income statement and the balance sheet. With a little bit of formatting, the data became legible and ready for interpretation.
Then came the second challenge which required crunching a few numbers to evaluate Costco’s financial standing. For the income statement, I compared the year-over-year change between 2022 and 2023 as well as 2021 and 2022. I also focused on the following ratios: Interest coverage, ROA, ROE, EBIT %, and Net Income %.
For the balance sheet, I analyzed the following ratios: Current ratio, DSO, DIO, DPO, Net trading cycle, and Debt ratio.
Results and Interpretation:
The current ratio evaluates Costco’s liquidity, which measures the ability to pay short-term obligations with current assets. Relative to its main competitors, Sam’s Club (0.85) and BJ’s Wholesale Club (0.73), Costco’s higher than average current ratio (1.07) means they are better able to pay its current liabilities. However, they may want to consider if assets can be invested even more effectively.
The net trading cycle = DSO + DIO - DPO shows Costco’s working capital efficiency. The negative figures in days show that it takes longer for Costco to pay back its suppliers than to receive cash from its customers. It takes an average of 278 days for Costco to pay back its suppliers while it takes an average of 4 days to receive cash from its customers for the periods ending August 2022 and September 2023. Costco is able to increase revenue each year without significant working capital investments.
The debt ratio illustrates Costco’s solvency position, showing that for every dollar of assets, $0.66 are funded by liabilities. Debt is a cheaper form of financing than equity and this ratio indicates that Costco is leveraging debt to finance increased operations.
Costco’s operating income is approximately 50 times higher than its interest expenses which is completely reassuring as it shows that the company will not face any solvency issues in the near future.
In terms of profitability, Costco’s net income grew consistently in the last 3 years. ROA, ROE, EBIT %, and Net Income % remained constant. In summary, Costco’s strategic pricing, membership model, and operational excellence have played pivotal roles in its consistent net income growth over the past few years.
Lessons Learned:
From doing the financial statement analysis on Costco, I learned that the ratios only mean so much on its own and can be a lot more informative when put into context with its competitors, the economy, and the overall environment. I learned a lot of lessons regarding the interpretation of ratios and doing competitive research. I now spend a lot more time finding contextual information for a better understanding of the financial indicators of a company’s performance.
