Abstract

A thorough analysis by a prominent banker evaluates Costco's creditworthiness by

scrutinizing its financial statements. The report reveals excellent liquidity levels, well-

balanced debt, and efficient business processes. After such an in-depth review, the results

reiterate the lender's acknowledgement of Costco, and prompt the importance of choosing to

loan after meticulous financial examination.

 Table of Contents

INTRODUCTION....................................................................................................................4

COMPANY OVERVIEW........................................................................................................4

ROLE OF MAJOR BANKER................................................................................................ 5

FINANCIAL STATEMENT ANALYSIS............................................................................... 6

RISK ASSESSMENT AND CREDITWORTHINESS........................................................14

INVESTMENT DECISION.................................................................................................. 15

CONCLUSION.......................................................................................................................15

REFERENCES.......................................................................................................................17

APPENDICES........................................................................................................................ 18
 Introduction

This report aims to perform a thorough analysis of Costco Wholesale Corporation's financial

statements from the perspective of a major banker. The primary focus is to determine

Costco's financial health, creditworthiness, and risk profile by closely evaluating its key

financial metrics and ratios (costco, 2023). By putting ourselves in the shoes of a major

banker, the resulting insights will help determine whether it's viable to extend credit to

Costco. Founded in 1983, Costco has transformed the retail sector with its innovative model

of the warehouse club business. It markets a variety of competitively-priced products across

multiple countries while placing customers at the center of its business strategy. As a result,

Costco has become a market leader, setting new industry benchmarks along the way.

Being a major banker holds great importance when it comes to assessing financial statements

of a company (Cashflow, 2023). It is not just a mere evaluation but rather serves as the

foundation of lending decisions that significantly affect the stability, growth, and operations

of the said company. Their evaluation takes account of credit-worthiness and associated risks

of extending financial assistance using financial data analysis to favor positivity rather than

resistance. Costco's role involves determining whether the company's financial standing

meets the requirements of a major lender and whether substantial financial resources should

be allocated.

Company Overview

Since its establishment in Seattle, Washington back in 1983, Costco Wholesale Corporation

has grown into an international retail leader in the industry (Balance sheet, 2023). Standing

out for its warehouse club model, the store has revolutionized shopper experiences by

providing customers with diverse, high-quality items at unbeatable prices. Firmly placing

great importance on operational efficiency and satisfying consumer demands, cost-

effectiveness, customer membership, and loyal relationships. Despite competition trends

evolving with customer changes and technological advancement, Costco operates differently

in office locations worldwide by being known for its versatile merchandise options, from

economic to fashion-forward buys. Beyond spreading value and revenue easily through

congregation with consumers, the company recognizes markets outside the United States

(Income statement, 2023).

By expanding into international markets, including Canada, Mexico, Japan, and the United

Kingdom, the corporation has been able to offer its products to diverse consumer markets

without sacrificing quality or value. In recent years, Costco has invested in e-commerce

technology to stay up-to-date with evolving customer trends. Members can now shop online

for select products and Costco has had much success in this area. The company's commitment

to sustainability carries through even on a global level with admirable environmental

initiatives put in place, including investments in renewable energy and helpful waste

reduction practices (Fridson, & Alvarez, 2022).

2022 saw Costco embarking on expansive efforts to increase its presence in different regions

through the opening of numerous new warehouse locations. This move was aimed at

strengthening the company's commitment to growth and augmenting accessibility to

customers. The ability of Costco to consistently perform financially and adapt to the ever-

changing market conditions has earned significant recognition, positioning it as a formidable

and unbreakable stakeholder in the retail market.

Role of Major Banker

When a major banker assesses a potential borrower's financial health, they perform a

thorough evaluation of the company's financial statements, ratios, and operational

performance (Robinson, 2020). This helps them determine the company's ability to meet its

financial obligations and maintain operational consistency while repaying any debt. The
primary priority of a major banker is to protect the institution's capital while ensuring

sensible lending practices. Therefore, the stability and creditworthiness of the chosen

company are essential factors that they consider before approving the loan as it impacts the

bank's potential risk. To minimize such risks, a major banker aims to align the institution's

interests with the company's financial position and potential, foster stable capital flows,

empower sustainable profitability, and maintain manageable debt levels, among others

(Wahlen, Baginski, & Bradshaw, 2022). Such indicators of creditworthiness are fundamental

to aligning a major banker's interests with that of a chosen company.

Financial Statement Analysis

Figure 1: Horizontal analysis of Income statement

 Source: (Income statement, 2023)

Costco experienced a consistent growth in its overall revenue from the years 2020 to 2023,

with a dramatic increase in 2022. However, there was a fall in the revenue in 2023 as

compared to the preceding year due to evolvement in consumers' spending behaviors and

global economic conditions. The expenditure involved in the making of revenue also

increased in these years. Nonetheless, the step of grow that revenue establishes, has

overtaken the corresponding increase in costs, indicating the cost of goods sold has been

executed positively leading towards a better ratio of gross profit.

Figure 2: Horizontal analysis of Balance sheet

Source: (Balance sheet, 2023)

The Total Assets of the company have consistently increased from 2020 to 2022. However,

there was a decline recorded in 2022. This drop may be attributed to shifts made in the

company's investments, acquisitions, or capital expenditures. The Total Liabilities Net

Minority, which is the amount of money that the company owes, has gone up from 2020 to
2022. There was a decrease in the year 2022 if compared to the previous year, hinting that

Costco could have managed to minimize a few expenses. The Total Equity Gross Minority

Interest has also been rising, especially in the period from 2020-2021. This implies that

Costco's retained earnings and investment contribution could improve the growth of the

company's equity.

Figure 3: Horizontal analysis of Cashflow

Source: (Cashflow, 2023)

Operating Cashflow: Even with a dip in 2022, operating cash flows decreased marginally

between 2020 and 2023. An effective cash management strategy and improved profitability

may have contributed to the notable increase in 2021.

Investing Cashflow: Investing cash flow at Costco is consistently negative, which indicates

significant capital expenditures and investment activities needed to support the company's

growth initiatives.

Financial Cashflow: Though the financing cash outflows decreased considerably from 2020

to 2021, the years that followed registered fluctuations. As per the analysis, the drop in 2021

could have resulted from the low repayment of debts and capital stock purchases. Conversely,
the increased financial activities seen in 2023 show the possibility of past acts being resumed

once more.

Figure 4: Vertical analysis of Income statement

Source: (Income statement, 2023)

Revenue Breakdown: It has been revealed through analysis that there will be a steady

increase in overall revenue from 2020 to 2023 thereby proving the company's proficiency in

grabbing a larger market share. The percentage of cost of revenue in comparison to the total

revenue seems to had remained stable with a negligible decline annually promoting the fact

that Costco could skillfully maintain cost effectiveness whilst stepping forward in their

revenue growth endeavor.

Gross Profit and Operating Expenses: Despite continuing to grow revenue, Costco's gross

profit margin remained relatively consistent.

 Figure 5: Vertical analysis of Balance sheet

Source: (Balance sheet, 2023)

Total Assets: As Costco expands and builds on its asset base, its total assets have grown

significantly. Investments in various assets, including equipment, property, and working

capital, could explain this expansion.

Total Liabilities Net Minority: An increase in liabilities indicates the company has

borrowed more or has incurred more debt. Costco's operations and growth initiatives were

supported by external financing, as shown by this growth.

 Figure 6: Vertical analysis of Cashflow

Source: (Cashflow, 2023)

Operating Cashflow: As Costco's core business operations have been efficiently managed,

operating cash flow has grown over the years. From their core activities, the company

generates increasing percentages of cash.

Investing Cashflow: Even though the values are negative, the percentages show a shift

towards using cash more efficiently in investment endeavors. The decrease in cash outflow

for investing implies that the company may be concentrating on improving its investment

choices and capital spending.

Financing Cashflow: In 2021, financing cash flow declined dramatically as a percentage,

suggesting a significant change in financing activities. It is possible that a more stable

financing strategy will lead to an improvement in percentages in 2022 and 2023.

 Figure 7: Current Ratio

Source: (Balance sheet, 2023)

Costco's current ratio shows how well the company can pay back its short-term debts with its

short-term assets. The ratios for 2022 and 2021 show a small increase in liquidity, with values

of 1.02 and 1.00 respectively. This means that Costco is in a decent position to fulfill their

short-term responsibilities.

Figure 8: Debt-To-Equity ratio

 Source: (Balance sheet, 2023)

The proportion of debt in a company's capital structure compared to equity can be determined

by the debt-to-equity ratio. With ratios of 0.44 in 2022 and 0.58 in 2021, a decrease in the

level of debt in contrast to equity is displayed which denotes a more guarded method of

financing and an enhancement in the company's financial security.

Figure 8: Gross Profit Margin

Source: (Income statement, 2023)

The gross profit margin shows the proportion of revenue that ultimately becomes gross profit.

Even though there was a slight decrease in the gross profit margin from 12.88% to 12.15%

from 2021 to 2022, this could be attributed to alterations in the cost of goods sold related to

revenue. Therefore, it is important to continue cost management to preserve profitability.

 Figure 10: Asset Turnover Ratio

Source: (Income statement, 2023)

When it comes to gauging a company's ability to generate revenue through its assets, the

asset turnover ratio is a crucial metric. In 2022, the ratio stood at 3.68 while the previous year

saw it hit 3.413. These figures demonstrate significant increases in revenue generated per

each asset unit, much in part thanks to better optimization of assets and business operations.

Risk Assessment and Creditworthiness

When bankers review Costco's creditworthiness, they need to identify any risks that could

negatively impact its ability to fulfill its financial obligations. This includes looking at factors

like changes in consumer preferences, technological developments, and intense competition,

which could all affect its revenue. Potential economic conditions, from inflation to a

recession, can alter consumer spending and cause revenue to suffer. Furthermore, changes to

regulations, specifically in labor practices and environmental standards, put pressure on

Costco to increase its compliance costs (Mbona, & Yusheng, 2019). If there are any mistakes

with generating cash flows because of these risks, Costco's capacity to uphold its banking
commitments and pay back debt could be affected, so it’s crucial for bankers to thoroughly

and comprehensively evaluate these factors to accurately assess the risk of lending to Costco.

Investment Decision

In light of financial analysis and risk assessment, I recommend that as a major bank, we

should continue lending money to Costco. Though reductions in revenue growth and

economic fluctuations serve as potential obstacles, Costco's liquidity ratios remain robust

with a current ratio consistently above over 1 and thus reveal its ability to satisfy short-term

obligations. It's worth noting that the leverage ratio exhibits a relatively controllable debt-to-

equity ratio, which helps contain excessive financial risks. Strong profitability rates stress on

healthy gross profits margins at Costco and show that they possess efficient operations.

Moreover, their asset turnover ratio features their adeptness towards matching asset usage

with the generation of revenue. Although uncertainties are an inherent aspect of life, the

company’s sturdy financial background, market position, and judicious management actions

establish their capability toward weathering down adversities, emerging creditworthy, and

implying how lending money to Costco aligns well with accurate risk-benefit modeling.

Conclusion

To summarize, this document explored the importance of a major banker's role and their

ability to evaluate the financial health of a company. Our comprehensive evaluation of

Costco's finances, which included examining their income statements, balance sheets, cash

flow, and key ratios, allowed us to identify trends and assess possible risks. Potential

challenges such as industry unpredictability, competitive pressures, and regulated factors

were observed during the risk assessment. Based on this study, the investment

recommendation is to continue providing loans to Costco, pending their strong monetary

liquidity, their manageable use of leverage, and efficient business performance. Overall, this
analysis highlights the essential role involved in making informed borrowing decisions,

which prioritizes a thoughtful balance between comprehending financial indicators and

mitigating possible risks in the interest of responsible lending strategy.

 References

Balance sheet, C. (2023). Retrieved from https://finance.yahoo.com/quote/COST/balance-

sheet?p=COST

Cashflow, C. (2023). Retrieved from https://finance.yahoo.com/quote/COST/cash-flow?

p=COST

costco, A. (2023). Retrieved from https://www.costco.com/about.html

Fridson, M. S., & Alvarez, F. (2022). Financial statement analysis: a practitioner's guide.

John Wiley & Sons.

Income statement, C. (2023). Retrieved from

https://finance.yahoo.com/quote/COST/financials?p=COST

Mbona, R. M., & Yusheng, K. (2019). Financial statement analysis: Principal component

analysis (PCA) approach case study on China telecoms industry. Asian Journal of

Accounting Research, 4(2), 233-245.

Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.

Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2022). Financial reporting, financial

statement analysis and valuation. Cengage learning.

 Appendices

Horizontal Analysis of Income statement

Source: (Calculated in excel)

Horizontal Analysis of Balance sheet

Source: (Calculated in excel)

 Horizontal Analysis of Cashflow

Source: (Calculated in excel)

Vertical Analysis of Income statement

Source: (Calculated in excel)

Vertical Analysis of Balance sheet

Source: (Calculated in excel)

Vertical Analysis of Cash flow

Source: (Calculated in excel)

 Ratio Analysis

Source: (Calculated in excel)