Analysis and Interpretation of Profitability

Balance sheets and income statements for Costco Wholesale Corporation follow.

Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	September 1, 2013	September 2, 2012	August 28, 2011
Revenue
Net Sales	$102,870	$97,062	$87,048
Membership fees	2,286	2,075	1,867
Total revenue	105,156	99,137	88,915
Operating expenses
Merchandise costs	91,948	86,823	77,739
Selling, general and administrative	10,104	9,518	8,691
Preopening expenses	51	37	46
Operating Income	3,053	2,759	2,439
Other income (expense)
Interest expense	(99)	(95)	(116)
Interest income and other, net	97	103	60
Income before income taxes	3,051	2,767	2,383
Provision for income taxes	990	1,000	841
Net income including noncontrolling interests	2,061	1,767	1,542
Net income attributable to noncontrolling interests	(22)	(58)	(80)
Net income attributable to Costco	$ 2,039	$ 1,709	$ 1,462

 

Consolidated Balance Sheets
($ millions, except par value and share data)	September 1, 2013	September 2, 2012
Assets
Current assets
Cash and cash equivalents	$ 4,644	$ 3,528
Short-term investments	1,480	1,326
Receivables, net	1,201	1,026
Merchandise inventories	7,894	7,096
Deferred income taxes and other current assets	621	550
Total current assets	15,840	13,526
Property and equipment
Land	4,409	4,032
Buildings and improvements	11,556	10,879
Equipment and fixtures	4,472	4,261
Construction in progress	585	374
	21,022	19,546
Less accumulated depreciation and amortization	(7,141)	(6,585)
Net property and equipment	13,881	12,961
Other assets	562	653
Total assets	$ 30,283	$ 27,140
Liabilities and equity
Current liabilities
Accounts payable	$ 7,872	$ 7,303
Accrued salaries and benefits	2,037	1,832
Accrued member rewards	710	661
Accrued sales and other taxes	382	397
Deferred membership fees	1,167	1,101
Other current liabilities	1,089	966
Total current liabilities	13,257	12,260
Long-term debt, excluding current portion	4,998	1,381
Deferred income taxes and other liabilities	1,016	981
Total liabilities	19,271	14,622
Equity
Preferred stock, $0.005 par value:
100,000,000 shares authorized; no shares issued and outstanding	0	0
Common stock, $0.005 par value:
900,000,000 shares authorized;
436,839,000 and 432,350,000 shares issued and outstanding	2	2
Additional paid-in-capital	4,670	4,369
Accumulated other comprehensive (loss) income	(122)	156
Retained earnings	6,283	7,834
Total Costco stockholders’ equity	10,833	12,361
Noncontrolling interests	179	157
Total equity	11,012	12,518
Total liabilities and equity	$ 30,283	$ 27,140

 

HINT: For Sales use “Total revenues” for your computations, when applicable.

(a) Compute net operating profit after tax (NOPAT) for 2013. Assume that the combined federal and state statutory tax rate is 37%. (Round to the nearest whole number.)

2013 NOPAT = Answer 2099 ($ millions)

(b) Compute net operating assets (NOA) for 2013 and 2012.

2013 NOA = Answer 9886 ($ millions)
2012 NOA = Answer 9045 ($ millions)

(c) Compute Costco’s RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2013. (Do not round until final answer. Round two decimal places. Do not use NOPM x NOAT to calculate RNOA)

2013 RNOA = Answer 22.18%
2013 NOPM = Answer 1.996%
2013 NOAT = Answer 11.11

(d) Compute net nonoperating obligations (NNO) for 2013 and 2012.

2013 NNO = Answer (-1126) ($ millions)
2012 NNO = Answer (-3476) ($ millions)

(e) Compute return on equity (ROE) for 2013. (Do not round until final answer. Round answer two decimal places)

2013 ROE = Answer 17.58%

(f) Infer the nonoperating return component of ROE for 2013. (Use answers from above to calculate. Round two decimal places.)

Answer = -19.55 %

(g) What does the relation between ROE and RNOA suggest about Costco’s use of equity capital?

ROE < RNOA implies that Costco’s equity has grown faster than its NOA.

ROE > RNOA implies that Costco has taken on too much financial leverage.

ROE > RNOA implies that Costco is able to borrow money to fund operating assets that yield a return greater than its cost of debt.

ROE < RNOA implies that Costco is holding significant levels of nonoperating assets that are not earning as big of a return as its operating assets.