COSTCO WHOLESALE CORP (NASDAQ:COST) – A Quality Stock with Strong Fundamentals

COSTCO WHOLESALE CORP (NASDAQ:COST) stands out as a strong candidate for quality investors, meeting key criteria for profitability, financial health, and sustainable growth. The company’s fundamentals reflect a well-managed business with competitive advantages, making it a compelling option for long-term investors.

Why COSTCO Fits the Quality Investing Criteria

• High Return on Invested Capital (ROIC): COSTCO’s ROIC of 31.66% (excluding cash and goodwill) is well above the 15% threshold for quality stocks, indicating efficient use of capital.
• Strong EBIT Growth: The company’s EBIT has grown at a 14.4% annual rate over the past five years, outpacing its revenue growth of 6.7%, a sign of improving profitability.
• Low Debt Relative to Cash Flow: With a debt-to-free-cash-flow ratio of 0.83, COSTCO could pay off its debt in less than a year using current cash flow, reflecting financial strength.
• High Profit Quality: Over the past five years, COSTCO has converted 103% of net income into free cash flow, demonstrating reliable earnings.
• Consistent Revenue Growth: Analysts expect future revenue growth of 6.7%, reinforcing the company’s ability to expand steadily.

Key Takeaways from the Fundamental Report

• Profitability: COSTCO scores well on profitability metrics, with strong returns on equity (29.8%) and assets (10.4%). Operating and profit margins have also improved over time.
• Financial Health: The company maintains a solid balance sheet, with a low debt-to-equity ratio (0.23) and an Altman-Z score of 10.2, indicating minimal bankruptcy risk.
• Valuation: While COSTCO trades at a premium (P/E of 60.4), its high profitability and growth prospects may justify the valuation for quality-focused investors.

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Disclaimer

This is not investing advice! The article highlights observations at the time of writing, but you should conduct your own analysis before making investment decisions.