A 2.9% Profit Margin and a 31% Return on Equity: A Ratio Analysis of Costco Wholesale's Fiscal 2025 Financial Statements, With Liquidity, Efficiency, Solvency, Profitability and a DuPont Breakdown
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ACC/291: Principles of Accounting II
Week 5 Assignment
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[Date]
Costco Wholesale Corporation operates membership warehouses in the United States and more than a dozen other markets. It reported total revenue of $275.2 billion for the fiscal year ended August 31, 2025, made up of net sales of $269.9 billion and membership fees of $5.3 billion (Costco Wholesale Corporation, 2025a). Costco keeps only about three cents of each revenue dollar as profit, yet it earns a return on its owners' equity above 30%. This paper computes the main ratios for fiscal 2025 and 2024 from the company's annual report and explains how both facts can be true. All amounts are in millions of dollars unless stated otherwise.
Liquidity: Can Costco Pay Its Short-Term Bills?
At the end of fiscal 2025, current assets were $38,380 and current liabilities $37,108, a current ratio of 1.03. A year earlier the ratio was 0.97, from current assets of $34,246 and current liabilities of $35,464 (Costco Wholesale Corporation, 2025b). The quick ratio, which counts only cash, short-term investments and receivables, was 0.50 in fiscal 2025, from $14,161 of cash, $1,123 of short-term investments and $3,203 of receivables, up from 0.39.
Read in isolation, a current ratio near 1.0 and a quick ratio of 0.5 would worry a lender. For Costco, they reflect how the business works. Accounts payable of $19,783 were larger than the entire inventory of $18,116, which means Costco's suppliers are, in effect, financing all of the goods on its shelves. The company sells most inventory before it pays for it, a point the efficiency ratios make directly.
Efficiency: How Fast Do Goods Move?
Inventory turnover is cost of sales divided by average inventory. Cost of sales was $239,886 and average inventory was $18,382, so inventory turned about 13.1 times, or once every 28 days. In fiscal 2024 it turned 12.6 times, about every 29 days. A typical supplier invoice with terms of 30 days or more comes due after the goods have already been sold, which is why payables can exceed inventory.
Asset turnover, total revenue divided by average total assets of $73,465, was 3.75. Costco generated almost four dollars of revenue for every dollar of assets, a very high figure for a retailer with large warehouses on its balance sheet.
Solvency: How Much Is Borrowed?
Total liabilities were $47,935 against total assets of $77,099, a debt-to-assets ratio of 62%, down from 66% a year earlier. Most of those liabilities are payables and other operating obligations rather than borrowing: long-term debt, excluding the current portion, was only $5,713. Operating income of $10,383 covered interest expense of $154 about 67 times. By any measure of the ability to pay interest, Costco's debt is small.
The drop in the debt ratio partly reflects a rebound in equity. Equity fell from $25,058 to $23,622 during fiscal 2024, when Costco paid a special dividend of $15 per share in January 2024 and total dividends paid reached $9,041. In fiscal 2025, with dividends of $2,183 and share repurchases of $903, equity rose to $29,164 (Costco Wholesale Corporation, 2025b).
Profitability: How Much Is Earned?
Gross margin on merchandise, net sales minus cost of sales divided by net sales, was 11.1%, up from 10.9%. Operating margin on total revenue was 3.8%, up from 3.6%, and the net profit margin was 2.9% in both years, as net income grew 10% to $8,099. Diluted earnings per share rose from $16.56 to $18.21 (Costco Wholesale Corporation, 2025a).
Membership fees explain much of the profit. Fees of $5,323, up 10.3% after a fee increase in the United States and Canada, equaled about 51% of operating income. The warehouses sell merchandise at a margin that barely covers operating costs, and the fees paid in advance by members supply most of the profit.
Return on average assets was 11.0%. Return on average equity was 30.7%, compared with 30.3% in fiscal 2024.
DuPont Analysis: Where the 31% Comes From
Return on equity can be broken into three parts (Soliman, 2008). The profit margin of 2.94% times asset turnover of 3.75 gives return on assets of 11.0%. Multiplying by the equity multiplier, average assets over average equity, of 2.78 gives return on equity of 30.7%.
The breakdown answers the question in the introduction. Costco's high return does not come from pricing, since its margin is one of the thinnest in retailing. It comes from turnover, the speed at which the warehouses convert assets into sales, and from a balance sheet funded mostly by supplier credit rather than interest-bearing debt. This matters for forecasting as well. Fairfield and Yohn (2001) found that changes in asset turnover helped predict future changes in profitability, while changes in profit margin did not, which suggests an analyst following Costco should watch turnover first.
Cash Flow Check
Operating activities provided $13,335 of cash in fiscal 2025, about 1.6 times net income. Capital spending on new warehouses and equipment was $5,498, leaving free cash flow of about $7,837, which comfortably covered dividends and share repurchases (Costco Wholesale Corporation, 2025b). Earnings that turn into more cash than they report are a sign of earnings quality.
Limits of the Analysis
Three limits apply. Two years are a short window, and a fuller study would add a five-year trend and compare Costco with other warehouse and discount retailers, whose margins and turnover differ. Balance sheet ratios capture one day, August 31, which falls before the holiday buildup of inventory and payables, so the current ratio could look different at another point in the year. And the ratios use reported figures, so they depend on the accounting choices described in the notes, such as how the company values inventory and records membership fees over the membership year.
Conclusion and Recommendation
The ratios describe a company with thin margins, very fast turnover, modest borrowing and strong cash generation. The low current and quick ratios are not warning signs, because suppliers finance Costco's inventory and it sells that inventory in about four weeks. A lender would find interest coverage of 67 times and free cash flow near $7.8 billion reassuring. An investor would note that return on equity above 30% depends on turnover and on membership fees continuing to grow, and would watch renewal rates and inventory turnover as the first signs of change. On these statements, Costco is financially sound and efficiently run.
References
Costco Wholesale Corporation. (2025a, September 25). Costco Wholesale Corporation reports fourth quarter and fiscal year 2025 operating results [Press release, Exhibit 99.1 to Form 8-K]. U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/909832/000090983225000093/costex9918-k92525.htm
Costco Wholesale Corporation. (2025b). Annual report on Form 10-K for the fiscal year ended August 31, 2025. U.S. Securities and Exchange Commission. https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000909832&type=10-K
Fairfield, P. M., & Yohn, T. L. (2001). Using asset turnover and profit margin to forecast changes in profitability. Review of Accounting Studies, 6(4), 371-385. https://doi.org/10.1023/A:1012430513430
Soliman, M. T. (2008). The use of DuPont analysis by market participants. The Accounting Review, 83(3), 823-853. https://doi.org/10.2308/accr.2008.83.3.823
How this ACC 291 Week 5 example is structured
The ACC/291 shelf page describes Week 5 as ending with ratio analysis of one company, often a learning team paper. The paper takes one public company whose statements are free to check and compares two years, so every ratio has a point of reference. It groups the ratios by the question each answers, because a list of ratios with no question behind it is the most common weakness in this assignment, and it ends with a judgment. Students search this week as ACC 291 Week 5, ACC291 Wk 5 or ACC/291 Wk 5; all three are the same assignment.
ACC/291 Week 5 questions, answered
What does ACC/291 Week 5 usually ask for?
The ACC/291 shelf describes Week 5 as ending with ratio analysis of one company, often as a learning team paper. Many sections ask students to compute liquidity, solvency and profitability ratios from a real company's annual report and interpret the results.
Is a current ratio below 1.0 always a bad sign?
No. It depends on how quickly the company turns inventory into cash and how its suppliers are paid. A retailer that sells inventory before its supplier invoices come due can run safely with a current ratio near 1.0, while a manufacturer with slow-moving inventory could not.
What is a DuPont analysis?
A breakdown of return on equity into three ratios multiplied together: profit margin (net income over sales), asset turnover (sales over average assets) and the equity multiplier (average assets over average equity). It shows whether a high return comes from pricing, efficiency or borrowing.
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