Liquidity and Efficiency Ratios Liquidity ratios measure a company’s ability to
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Liquidity and Efficiency Ratios
Liquidity ratios measure a company’s ability to meet its short-term obligations. They are a key predictor of a company’s ability to make timely payments to creditors and to continue to meet obligations to lenders when faced with an unforeseen event. Efficiency ratios reflect how productive a company is in using its assets; and relates how much revenue is generated from the assets.
Current Ratio
Current Assets/Current Liabilities
This ratio represents the number of times short-term assets cover short-term liabilities and is an indication of a company’s ability to service its current obligations. A higher number is preferred because it indicates a strong ability to service short-term obligations.
The current ratio for 2015 is 1.05 which is down from 1.22, but compared to the baseline of .97 indicates the company’s ability to service short-term obligations is satisfactory.
Accounts Receivable Turnover
Net Sales/Average Accounts Receivable
This ratio measures the number of times receivables turn over in a year and reveals how successful a company is in collecting its outstanding receivables. A higher number is preferred because it indicates a shorter time between sales and cash collection.
The accounts receivable turnover rate for 2015 is 75.4 which is up from 2014’s rate of 60.6. This would indicate a nice improvement in turnover rate, and compared to the baseline of 71.1 would suggest this ratio may be on target with company objectives.
Profitability Ratios
Profitability ratios measure a company’s ability to generate a return on capital. Profitability and positive cash flows affect a company’s ability to remain solvent.
Return on Common Stockholder’s Equity
Net Income – Preferred dividends/Average Common Stockholders’ Equity
This ratio measures how well a company uses its investment dollars to generate profits. (It tells the common stock investor how effectively their capital is being reinvested.) A higher number is preferred because it indicates how well a company uses the money from its shareholders to generate profits.
The return on common stockholder’s equity for 2015 is 22.4% which is up from 2014’s 16.8% and a better return than the baseline’s 20.8%. This would indicate a satisfactory usage of common shareholders’ investments.
Market Prospects Ratios
Market ratios are used to compare publicly traded companies. They make market price information more meaningful.
Price-Earnings Ratio
Market Price Per Common Share/Earnings Per Share
This ratio is used as an indicator of the future growth and risk of a company’s earnings as perceived by the stock’s buyers and sellers. A higher number is preferred because it indicates a high expected growth.
The 29.0 price/earnings ratio for Costco is twice that of Walmart’s 14.5. This would indicate that Costco is expected to have higher growth than Walmart, and therefore, would be a lower risk stock.
Conclusion
help me to give a conclusion about costco also provide insight into the financial future of the company and give an investment recommendation. this subject is financial accounting
Explanation / Answer
The Costco Current RAtio (1.05) is better than the baseline (0.97) but down against previous (1.22). It indicates a comfortable liquidity position . However , the quick ratio could have given a better estimate.
The AR turnover rate in 2015 (75.4) is much better than the 2014 (60.6) and baseline 71.1. This is a very good trend and indicates effecient and quick collection of receivables.
The ROE is also showing improving trend . In 2015 it is 22.4% up from 16.8% of 2014 and better than baseline 20.8%.
The P/E ratio is 29 , twice that of competitor Walmart's 14.5. There may be two interpretations for such higher P/E ratio. Either the stock is overpriced or investors are expecting much higher returns from the stock.
As the liquidity, AR turnover amd ROE are quite good, it can be expected that Costco will keep improving its performance and the Earnings for Equity holders will grow.
Therefore the Costco stock is advisable for investment.
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