Stock Analysis

Is Costco Wholesale Corporation's (NASDAQ:COST) Latest Stock Performance A Reflection Of Its Financial Health?

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NasdaqGS:COST
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Most readers would already be aware that Costco Wholesale's (NASDAQ:COST) stock increased significantly by 7.1% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Costco Wholesale's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out the opportunities and risks within the US Consumer Retailing industry.

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Costco Wholesale is:

29% = US$5.9b ÷ US$21b (Based on the trailing twelve months to August 2022).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.29 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Costco Wholesale's Earnings Growth And 29% ROE

First thing first, we like that Costco Wholesale has an impressive ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. This probably laid the groundwork for Costco Wholesale's moderate 15% net income growth seen over the past five years.

We then performed a comparison between Costco Wholesale's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same period.

past-earnings-growth
NasdaqGS:COST Past Earnings Growth November 25th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for COST? You can find out in our latest intrinsic value infographic research report.

Is Costco Wholesale Efficiently Re-investing Its Profits?

Costco Wholesale has a healthy combination of a moderate three-year median payout ratio of 28% (or a retention ratio of 72%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Costco Wholesale has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 20% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we feel that Costco Wholesale's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

What are the risks and opportunities for Costco Wholesale?

Costco Wholesale Corporation, together with its subsidiaries, engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan.

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Rewards

  • Earnings are forecast to grow 9.52% per year

  • Earnings grew by 14% over the past year

Risks

  • High level of non-cash earnings

  • Significant insider selling over the past 3 months

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Share Price

Market Cap

1Y Return

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