What You Must Know About Costco Wholesale Corporation's (NASDAQ:COST) Financial Strength

The size of Costco Wholesale Corporation (NASDAQ:COST), a US$97.67b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Costco Wholesale’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into COST here.

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How does COST’s operating cash flow stack up against its debt?

Over the past year, COST has ramped up its debt from US$3.98b to US$6.49b , which is made up of current and long term debt. With this rise in debt, COST currently has US$7.04b remaining in cash and short-term investments for investing into the business. Moreover, COST has generated cash from operations of US$6.05b during the same period of time, resulting in an operating cash to total debt ratio of 93.25%, meaning that COST’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In COST’s case, it is able to generate 0.93x cash from its debt capital.

Can COST meet its short-term obligations with the cash in hand?

Looking at COST’s most recent US$19.41b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. For Consumer Retailing companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can COST service its debt comfortably?

With debt reaching 52.16% of equity, COST may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. The sustainability of COST’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For COST, the ratio of 44.84x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like COST are considered a risk-averse investment.

Next Steps:

Although COST’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around COST's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure COST has company-specific issues impacting its capital structure decisions. You should continue to research Costco Wholesale to get a better picture of the large-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for COST’s future growth? Take a look at our free research report of analyst consensus for COST’s outlook.
2. Valuation: What is COST worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether COST is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.