Analysis of Financing Activities: Costco

For a full overview of Costco’s balance sheet with vertical and horizontal analysis as well as pertinent financial ratios click here.

Costco saw a large decrease in several of its short term assets. Cash decreased by 26.7% from 2005 to 2006 and short term investments decreased by 5.37%. This substantial decrease in short term assets probably reflects the massive 9466.6% increase in current portion of long-term debt.

Such an increase in current long-term debt would normally be cause for concern, except long term debt decreased by $495,306,000 while current portion of long-term debt increased by “only” $305,298,000. This is indicative of old debt becoming due. Also, the fact that long term debt decreased by more than the amount due this year indicates that Costco is paying down its debt earlier than it is due, which is always a good sign.

The financial effects of Costco’s decreased Debt may be seen on the income statement as a 63.5% decrease in interest expense and an associated increase in the “times interest earned” ratio of 205%. This indicates that Costco is in a position where it can easily repay its lenders, showing that the corporation presents little chance of bankruptcy.

A wholly owned Canadian subsidiary of Costco has a $181 million commercial paper program. The corporation may be able to use the increasing strength of the Canadian dollar relative to the U.S. dollar to their advantage by borrowing from Canadians to purchase U.S. goods.

The corporation also owns a Japanese subsidiary with two $13 million lines of credit with applicable interest rates of 0.95% and 0.84%. Once again, Costco may use the strength of the Japanese Yen to purchase U.S. goods. Coupled with the remarkably low interest rate, Costco is in an excellent position to take advantage of the growing Japanese market. However, in April 2003, the Japanese subsidiary issued $34 million in promissory notes bearing interest payable semiannually at 0.92% with principle due in April 2010. If the Japanese subsidiary were not able to cover the cost of the principle, Costco would lose more money by having to pay with the relatively weaker (compared to the yen/dollar relationship of 2003) U.S. dollar.

Costco does not hold treasury stock. Any shares repurchased are retired. The Corporation's board has authorized the repurchase of $3 billion worth of common stock over the next three years beginning in January 2006. Although the repurchase is contingent on the economic status of the corporation, given the current growth exceeding the acquirement of assets, there exists a high probability of the buy-backs occurring. If the buy-back does occur, the market price of the stock may increase due to higher earnings per share value and a resulting lower PE and PEG.