Return on Equity (ROE) has declined 4.4 percent between 1998 and 2001, and Return on Assets (ROA) has decreased 1.40 percent has between 1998 and 2001. Additionally, financial leverage has declined .18 percent over four years. The profitability of this company has not improved during the company’s growth.
Although the total sales of Costco have increased during this four-year period, the total asset turnover ratio for Costco decreased 0.4 percent during The Company’s total assets have increased 57.67 percent during the same period. From 1997 to 2001, the net income of Costco increased 92 percent; the return on sales showed an average total of 1.78 percent, up from 1997, which was 1.43 percent. Total current liabilities increased 4.90 percent during this four-year period but the company saw an increase in store locations from 274 to 365. Costco’s growth was financed by increased net sales of goods, membership fees, and an increase of 5.45 percent in common stock. The four questions listed above provide a path forward in advising whether to increase equity investment in Costco or divest.
Costco has grown exponentially as mentioned above. However, this growth has come at a cost, one that affects the bottom line, net income. Exhibit 5 details the net income from 1997-2001; this provides us with telling evidence that growth has negatively impacted Costco. For example, from 2000 to 2001 net sales increased and the membership fees, however total operating expenses increased a considerable 8.6%, which is far less than the 17% increase from ’99-’00. The issue was the increase in both merchandise cost and SGA as a percentage of sales. Consequently, net income decreased by 4.6%. Other factors that were affected by Costco growth were the increase in both short-term and long-term borrowing along with more shares being issued by the company (see exhibit 5a and 5b). Based on the