Think Costco Wholesale Is Expensive? This Chart Might Change Your Mind.

Is Costco really worth its premium price tag

These two trends can justify the retailer's lofty valuation

The stock traded at a luxurious 55. 8 times trailing earnings on June 26, or 59. 6 times free cash flow

Image source: Getty Images

So you wouldn't be the first investor to call Costco's stock "expensive. " But you might change your mind when you look at the chart below

Costco's rising fits and efficiency I'm to show you a rare combination

Costco has a long-standing habit of growing its cash fits, while also making better and better use of the new capital over time

COST Free Cash Flow data by YCharts

Costco's financial engine runs smoother than Kirkland butter Free cash flow is the fit that's left over after paying off operating expenses and capital expenses

This capital can be used to finance dividend payouts, execute buybacks, acquire smaller rivals, or boost the balance sheet's cash reserves

It's a measure of real cash fits, rather than the tax accounting construct you know as net fit or earnings

And Costco earns a lot of cash fits

Return on invested capital (ROIC) measures how effectively a company puts its fits to work

The company also ders consistently wider ROIC margins over time, while most retailers struggle to keep ROIC stable

As Costco pairs richer ROIC readings with growing cash flows, it keeps ing a flywheel of constant imvements

That's an incredibly holder-friendly combination

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors

Anders Bylund has positions in Amazon and Walmart

The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart

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