6.5 Financial Ratios in Action
Liquidity and Profitability: Costco
Costco, when you look at it, is a very basic kind of business. They run stores, organized as warehouses, and sell everyday merchandise. Take a look at their 2019 report[1]. On pages 34-35, you’ll find Costco’s Balance Sheet and Income Statement. Look at its profitability ratios. What is its current ratio, and Total Liabilities-to-Total Assets Ratio? How much of its current assets are tied up in inventory? Here is Costco’s more recent (2021) report:
https://investor.costco.com/static-files/0878117f-7f3f-4a77-a9a5-c11a2534e94d
Solvency: Some Interesting History
General Motors became insolvent in 2007-2008. Apple Computers borrowed a huge amount of money in 2013. Here are their stories.
The Bankruptcy of General Motors
Here is General Motors’ Financial Report for 2007[2], just before it declared bankruptcy. Notice the “splash” in its early pages; it is replete with attractive product photographs. Since there is so much stuff in the report to read, try to focus on the following. On page 82, you will notice that it lost money – a lot. On page 83, take a look at the Balance Sheet, especially Total Assets, Total Liabilities, and Equity. Does it come as any surprise that its auditors complain of poor “internal controls” on pages 80-81?
There was a time when it was said that “as GM goes, so goes America.” Well, that was long ago. In 2009, GM filed for bankruptcy[3].
The Case of Apple Computers
Apple Computers issued a huge amount in debt in 2013 in spite of its having, at the same time, a great, as in really a lot, deal of cash. Here’s why they sold (a.k.a., issued or borrowed) debt.[4]
Here are Apple’s Balance Sheets from 2005-2019[5]. Notice how Long-term Debt went from zero to $17 Billion from 2012 to 2013. Calculate its Debt-to-Assets ratio for both years.
- Costco. (2019). 2019 Annual report: Fiscal year ended September 1, 2019. Costco investor relations. https://investor.costco.com/static-files/05c62fe6-6c09-4e16-8d8b-5e456e5a0f7e ↵
- General Motors Corporation (2007). General Motors Corporation 2007 annual report. Annual reports. https://www.annualreports.com/HostedData/AnnualReportArchive/g/NYSE_GM_2007.pdf ↵
- Isidore, Chris (2009 June, 2) GM bankruptcy: End of an era. CNN Money. https://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/ ↵
- References Balassi, J., & Cox, J. (2013). Apple wows market with record $17 billion bond deal. Retrieved Sep 20, 2021, from https://www.reuters.com/article/us-apple-debt/apple-wows-market-with-record-17-billion-bond-deal-idUSBRE93T10B20130430 ↵
- https://www.macrotrends.net/stocks/charts/AAPL/apple/balance-sheet ↵
