When analyzing the financial performance of Costco and Wal-Mart, it is evident that profitability is one of the major concerns for both companies. However, due to the economies of scale and market capitalization, Wal-Mart has been able to achieve a considerably high net profit margin when compared to Costco and Wal-Mart and also has been able to earn a modest return on assets and return on equity which averages more than 9% over the past 3 years from 2011-2013. Costco, on the other hand, has struggled to maintain a solid level of profitability and due to this reason has merely achieved a break even (Star, 2015)
Competitive Advantage for Costco over Wal-Mart
By analyzing the ratios of 2011, 2012 and 2013, it is evident that some interesting assumptions could be derived from the performance of these companies. Costco is a safe investment for its creditors because relatively low risks are associated with the company. Due to this reason, the company has the potential to achieve high profitability.
Competitive Disadvantage for Costco over Wal-Mart
Costco, although is good at making profits, has certainly been very inefficient in using its assets when compared to Wal-Mart. Another problem for Costco is the amount of time it takes for the company to recover its trade receivables from its debtors. The reason the company is struggling in this regard is due to the company’s strategy to compete with Wal-Mart and to differentiate itself from its customers be being able to offer a unique shopping experience to its customers and this could justify a high level of receivables as the company wants to expand its business.