Margarita Torres

1) Summary

Margarita Torres, a Costco shareholder for the last 5 years, decides to reevaluate her investments in the company. Although she is happy with its performance, she wonders if its fast growth could impact its future. In order to organize her thoughts and make the right decision, Torres decides to study the scenario using two methods: ratio analysis and cash flow. The first one allows her to see what has changed in certain lines over a time, and even compare them to similar companies. The second, makes her understand what cash requirements are needed to fund and expand the business and the sources of that cash.

2) Why did Torres evaluate her investments using two methods: Ratio analysis and Cash Flow Analysis. What did these two methods tell her?

Margarita Torres chose to evaluate her investment based in the two methods because both of them together would provide her a bigger picture of Costco’s financial situation. If she decided to base her decision only on the cash flow analysis, she would only be looking to Costco’s capacity to make money or not over that period of time. The problem is that the information provided only by the cash flow is not enough to run a detailed analysis of the real situation.

The ratio analysis, on the other hand, can provide more detailed information about the numbers. You can use it to compare numbers over a period of time, compare it to future projections or even compare it to the industry’s performance. Basically, analyzing ratios, Torres could understand more about Costco’s past performance and potential growth.

The two methods combined would definitely provide her a better and profound knowledge of Costco’s situation.

3) What did you learn from the Analysis performed? Include the common financial statements, sustainable growth model and the