Paul:
I did not see the SBUX story, but this one was one difficult read for me ...
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An excerpt from the Motley Fool, part 3 of the ROE series:
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"Does this still meet Buffett's thinking? With the right amount of leverage, the company can get to a return on equity that meets and surpasses its cost of equity.
To figure where leverage might be, one might assume a company like this targets ROE of 15-18%, which would beat the cost of equity. Divide ROE of 0.15 through 0.2 by the ROA of 0.067. That will give you the leverage required. Leverage is probably in the neighborhood of 2.2 to 3 times assets to equity. Looking at the data above, it's right in the middle of that range, at 2.45 times assets to equity, so ROE = 0.067 x 2.45 = 16.4%, at the conservative end of things but still highly satisfactory. ........... zzzzzzzzzzzzzzzzzzzzzzzzz
In addition, we have to consider what part of that leverage is comprised of interest-bearing debt and what part is comprised of noninterest-bearing liabilities. We know first that a retailer such as this has to carry lots of inventory -- after all, the model of Costco is to offer a huge selection of stuff at a discount to retail prices. We would therefore expect that there's a big chunk of accounts payable on the liabilities side of the balance sheet to offset the large amount of inventory on the assets side of the balance sheet.
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zzzzzzzzzzzzzzzzzzzzzzzzzzzzz We're getting to the point where this isn't an especially leveraged company as expressed in the more familiar debt-to-equity ratio. Bear with me, we're going somewhere with this. (my emphasis)
With average financial debt of $1.116 billion, the company's average debt-to-equity ratio during the year was 52.6%. That's not especially leveraged and I would expect its interest coverage ratio (also called its times-interest-earned ratio, expressed as earnings before interest and taxes) to be very high. ................" zzzzzzzzzzzzzz
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Is there anyone in COST land that can read, and understand this and give those of us that can't some meaningful idea of what the MF is talking about??? Tough read!! Sorry I posted yesterday!
Mel |
