Wal-Mart and Costco

Topics: Wal-Mart, Financial ratios, Sam's Club Pages: 7 (1787 words) Published: March 6, 2013
1. Introduction

Wal-Mart was founded by Sam Walton on 1962 and it is the largest retailer in the world. The company has three major operations which are Wal-Mart Stores U.S., Sam's Club, and Wal-Mart International. On 2007, Wal-Mart used this new slogan” Save Money Live Better”. However, there are some critics about their employee life. Wal-Mart exploits their employee’s salary for setting low price to customer. They resisted their worker to build union organization because they tried to prevent from negotiating with employee. Nevertheless, Wal-Mart is still successful in the business because they attract lots of urban and rural consumers.

Costco was founded by James D. Sinegal and Jeffrey H. Brotman on 1983 and it is the largest membership warehouse club. Their goal is to provide low price products to customer as same as Wal-Mart. The difference between Wal-Mart and Costco is the strategy they use. Costco doesn’t offer plastic bag to customer so customer need to bring bags by themselves. Furthermore, the high order volume is another reason why Costco can lower the cost and price because they can negotiate with supplier.

2. Ratio Analysis

a. Activity Ratios:
It is used to evaluate asset utilization and turnover days. It also implies how well company operates its fixed asset and inventory in operating system.

Conclusion: Costco has really well operating efficiency according to its higher operating ratio. Furthermore, Costco not only maintain the ratio but increase it from 2005 to 2012. By contrast, Wal-Mart has obviously lower ratio in fixed asset turnover because Wal-Mart keeps buy equipment and property for expanding market. To short, Costco has better management in the use of asset and better improvement in the ratio trend.

a. Liquidity Ratios:
It can analyze the ability of paying expense in the short term. The higher current ratio and quick ratio mean the company has higher ability for exchanging asset to cash. The higher conversion cycle means they need more time to exchange the cash.

Conclusion: Wal-Mart and Costco have the similar ability to pay cash because both of them are categorized to retail industry. It means their cash liquidity will be very high. Wal-Mart has a little bit higher cash conversion cycle than Costco as a result of its company size. Moreover, Wal-Mart has pretty lower quick ratio than Costco that means Wal-Mart don’t control their cash position efficiently. For retail industry, cash liquidity is really important because retailer need to focus on inventory systems that need lots of cash to cover the system.

b. Solvency Ratios:
It describes how company uses their resource to manage fixed cost financing. The higher ratio means company takes higher risk in financing.

Conclusion: According to debt to asset, Costco performs lower risk on its company. However, based on their standard analysis which Wal-Mart is 1.3% and Costco is 3% the result means Wal-Mart performs more stable ability than Costco. Even though Costco has lower ratio than Wal-Mart, it still has higher potential risk than Wal-Mart. On 2006 Costco suddenly has higher interest coverage because of its convertible bonds. If Investors convert debt to stock, it will decrease its debt and interest expense immediately. By comparing them from 2007 to 2012, Wal-Mart is still more stable than Costco although it has lower interest coverage.

c. Profitability Ratios:
This ratio reflects the company’s earning ability directly. If the ratio is too low, it might make company go bankrupt or operating trouble.

Conclusion: Wal-Mart has higher net profit margin even economy is fact recession. The most reason is It is not only keeps expand its stores in United State but in the world. Wal-Mart almost increases 100% store growth from 2005 to 2012. That is another reason why Wal-Mart has more debt than Costco. By contrast to Wal-Mart, Costco only increase 36.7% store growth within 8 years and is...
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