Download File - Amy Toman e

Running head: COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Comprehensive Financial Analysis of CVS CareMark
Simonette Elgert, Jenna Godfryd, Brook Grzadzinski, Amy Toman
Siena Heights University
LDR 640-SJ Financial System Management
Prof. Lihua Dishman
May 11, 2013
1
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Abstract
CVS Caremark is one of the largest retail pharmacy chains in the United States. The
company has over 7,000 stores, 203,000 employees, and is ranked number 18 on the Fortune 500
list in 2012 (www.cnn.money.com). This company has steadily increased its growth and profits
over the last 3 years. In 2012, CVS had over 120 billion dollars in sales and has a net income of
nearly 4 billion dollars. Although CVS Caremark has had to overcome some setbacks over the
last year, they have showed steady gains in the market. They continue to have a competitive edge
over their competition, which can be seen through an increase in their stock market value.
The evaluation of CVS in 2011 and 2012 provides insight into the financial stability of
the company through the evaluation of the financial statements and financial ratios. It will
compare CVS Caremark to two of its competitors: Walgreen and Rite Aid. When compared to
its competitors, CVS Caremark is in excellent financial shape and appears to be able to withstand
the challenges that face the company. From this evaluation, it appears that there are little changes
that need to be made in order for CVS to maintain its financial stability. Future projections of
profitability, risk, and growth appear to be stable.
2
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Comprehensive Financial Analysis of CVS CareMark
Introduction to Financial Statement Analysis Using Financial Ratios
There are four categories of financial ratios that help to define the overall condition of a
company. These ratios help to give understanding to the relationships between financial
statements. They also provide historical information, internal strengths and weaknesses, and can
be used by investors to compare companies (www.smallbuisness.chron.com). In many ways, the
financial ratios are the most important because this is what investors look at in order to determine
if they will invest in a company. The four categories of financial ratios are: liquidity ratios,
solvency ratios, profitability ratios, and efficiency ratios.
According to Hawawini and Viallet (2011), a firm’s liquidity is “a term that refers to the
firm’s ability to meet its recurrent cash obligations toward various creditors” (p. 63). Being able
to meet these cash obligations is an important part in maintaining a healthy financial state. The
most common type of liquidity ratios are the current ratio, quick ratio, and the debt ratio. The
current ratio gives insight to the ability of a company to repay its short-term debt. This ratio
should be greater than one but closer to two in order to be favorable. The quick ratio also looks at
liquidity but it excludes inventory from its current assets. Therefore, this is a more conservative
ratio. The debt ratio looks at the total debt as compared to total assets. For example, if a firm has
a debt ratio less than 1, it has more assets then debt. However, if the debt ratio is greater than
one, it means there are more debts than assets.
The second category of financial ratios is the solvency ratios. These ratios look at the
debt as it relates to its assets and equity. The most common solvency ratios are the debt to asset
ratio and the debt to equity ratio. The debt to equity ratio looks at “what proportion of equity and
debt a company is using to finance its assets” (www.investopedia.com). While debt to asset ratio
looks at how much of the company’s assets have been financed with debt.
3
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
The third category of financial ratios is the profitability ratios. These ratios look at the
overall ability of a company to bring in a profit. The most common profitability ratios are the
return on assets, the return on equity, return on sales, the earnings per share, the price to earnings
ratio, and the times interest earned ratio. The return on assets ratio “measures the profit generated
by one dollar of assets” whereas return on equity ratio (ROE) “measures the profit generated by
one dollar of equity” and return on sales “measures the profit generated by one dollar of sales”
(Hawawini & Viallet, 2011, p. 144). The best indicator of profitability of a firm is ROE because
it is the most inclusive of all the decisions a firm has made over the course of the year. The
earnings per share ratio is important in determining the price per share. Price to earnings ratios
when high should represent higher earnings growth in the future when compared to a company
with a lower price to earnings ratio. The times interest earned ratio “indicates how many times
the firm’s pre-tax operating profit covers its interest expenses” (p. 152).
The last category of financial ratios is the efficiency ratios. These ratios can show how a
company uses its assets and liabilities. They can also “calculate the turnover of receivables, the
repayment of liabilities, the quantity and usage of equity, and the general use of inventory and
machinery” (www.investopedia.com). The two most common ratios of this type are inventory
turnover ratio and asset turnover ratios. Inventory turnover ratio is an indicator of how successful
a company is in turning over inventory into sales. “The higher the inventory turnover, the lower
the firm’s investment in inventories and the higher the efficiency with which the firm manages
its inventories” (Hawawini & Viallet, 2011, p. 80). The asset turnover ratio is important to
determine if a company’s revenue is growing in proportion to its sales. A higher asset turnover
ratio usually means a lower profit margin.
4
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
5
Financial Statements for CVS Caremark
Table 1
CVS Balance Sheets
All numbers in millions (except per share items and employee)
Dec 2012
Dec 2011
Cash and Equivalents
1,375.00
1,413.00
Receivables
6,473.00
6,047.00
Inventories
10,759.00
10,046.00
577.00
580.00
Total Current Assets
19,852.00
18,594.00
Property, Plant & Equipment, Gross
16,306.00
15,400.00
Accumulated Depreciation & Depletion
7,674.00
6,933.00
Property, Plant & Equipment, Net
8,632.00
8,467.00
Intangibles
9,753.00
9,869.00
Other Non-Current Assets
1,280.00
1,155.00
Total Non-Current Assets
46,060.00
45,949.00
Total Assets
65,912.00
64,543.00
9,044.00
7,857.00
695.00
806.00
0.00
0.00
Assets
Other Current Assets
Liabilities &Shareholders’ Equity
Accounts Payable
Short Term Debt
Other Current Liabilities
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Total Current Liabilities
6
13,790.00
11,956.00
Long Term Debt
9,133.00
9,208.00
Deferred Income Taxes
3,784.00
3,853.00
Other Non-Current Liabilities
1,501.00
1,475.00
(2.00)
(4.00)
Total Non-Current Liabilities
14,418.00
14,536.00
Total Liabilities
28,208.00
26,492.00
Preferred Stock Equity
0.00
0.00
Common Stock Equity
37,704.00
38,051.00
17.00
16.00
29,120.00
28,126.00
0.00
0.00
25,049.00
22,090.00
(16,270.00)
(11,953.00)
(212.00)
(228.00)
Total Capitalization
46,837.00
47,259.00
Total Equity
37,704.00
38,051.00
Total Liabilities & Stock Equity
65,912.00
64,543.00
1,231.00
1,298.00
Preferred Shares
0.00
0.00
Treasury Shares
436.00
342.00
Basic Weighted Shares Outstanding
1,271.00
1,338.00
Diluted Weighted Shares Outstanding
1,280.00
1,347.00
Minority Interest
Common Par
Additional Paid In Capital
Cumulative Translation Adjustment
Retained Earnings
Treasury Stock
Other Equity Adjustments
Total Common Shares Outstanding
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Number of Employees
Number of Part-Time Employees
7
203000
124000
77000
78000
*http://www.motleyfool.idmanagedsolutions.com/stocks/income_statement.idms?SYMBOL_US=CVS&TIME=
Table 2
CVS Income Statements
All numbers in millions (except per share items)
Dec 2012
Dec 2011
123,133.00
107,100.00
Cost of Sales
98,874.00
84,971.00
Gross Operating Profit
24,259.00
22,129.00
Selling, General, and Administrative Expenses
15,278.00
14,231.00
0.00
0.00
Operating Income before D & A (EBITDA)
8,981.00
7,898.00
Depreciation & Amortization
1,753.00
1,568.00
0.00
4.00
(348.00)
0.00
0.00
0.00
6,880.00
6,334.00
Interest Expense
557.00
588.00
Pre-Tax Income
6,323.00
5,746.00
Income Taxes
2,441.00
2,258.00
(2.00)
(4.00)
Sales
Research & Development
Interest Income
Other Income - Net
Special Income / Charges
Total Income Before Interest Expenses
(EBIT)
Minority Interest
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Net Income From Continuing Operations
8
3,882.00
3,488.00
(7.00)
(31.00)
3,875.00
3,457.00
Extraordinary Income/Losses
0.00
0.00
Income From Cum. Effect of Acct. Change
0.00
0.00
Income From Tax Loss Carry forward
0.00
0.00
Other Gains / Losses
0.00
0.00
Total Net Income
3,877.00
3,461.00
Normalized Income
(Net Income From Continuing Operations,
Ex. Special Income / Charge)
3,882.00
3,488.00
3,882.00
3,488.00
3.06
2.61
(0.01)
(0.02)
Basic EPS from Total Operations
3.05
2.59
Basic EPS from Extraordinary Inc.
0.00
0.00
Basic EPS from Cum Effect of Accounting
Change
0.00
0.00
Basic EPS from Tax Loss Carryf'd.
0.00
0.00
Basic EPS from Other Gains (Losses)
0.00
0.00
Basic EPS, Total
3.05
2.59
Basic Normalized Net Income/Share
3.06
2.61
EPS fr Continuing Ops.
3.03
2.59
Net Income From Discontinued Operations
Net Income From Total Operations
Preferred Dividends
Net Income Available To Common
Basic EPS from Continuing Ops.
Basic EPS from Discontinued Ops.
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
EPS fr Discontinued Ops
9
(0.01)
(0.02)
EPS fr Total Ops.
3.02
2.57
EPS frExtraord. Inc.
0.00
0.00
EPS fr Cum Effect of Accounting Change
0.00
0.00
EPS fr Tax Loss Carfd.
0.00
0.00
EPS fr Other Gains (L)
0.01
0.00
EPS, Total
3.03
2.57
Diluted Normalized Net Inc/Shr
(Net Income From Continuing Operations,
Ex. Special Income / Charge)
3.03
2.59
Dividends Paid per Share
0.65
0.50
* http://www.motleyfool.idmanagedsolutions.com/stocks/income_statement.idms?SYMBOL_US=CVS&TIME=
Table 3
CVS Statement of Cash Flows
All numbers in millions (except per share items)
Dec 2012
Dec 2011
3,875.00
3,457.00
348.00
(53.00)
0.00
0.00
(Increase) Decrease In Receivables
(387.00)
(748.00)
(Increase) Decrease in Inventories
(858.00)
607.00
3.00
(420.00)
Cash Flow from Operating Activities
Net Income (Loss)
Operating Gains/Losses
Extraordinary Gains / Losses
(Increase) Decrease In Other Current Assets
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
(Decrease) Increase In Payables
10
1,147.00
1,128.00
753.00
85.00
11.00
(47.00)
132.00
135.00
6,671.00
5,856.00
0.00
0.00
6,671.00
5,856.00
23.00
4.00
0.00
0.00
(2,030.00)
(1,872.00)
(371.00)
(1,191.00)
Purchases of Short-Term Investments
0.00
(3.00)
Other Cash from Investing Activities
529.00
592.00
(1,849.00)
(2,410.00)
1,239.00
1,463.00
836.00
431.00
Repayment of Long-Term Debt
(1,718.00)
(2,122.00)
Repurchase of Capital Stock
(4,330.00)
(3,001.00)
(Decrease) Increase In Other Current Liabilities
(Increase) Decrease In Other Working Capital
Other Non-Cash Items
Net Cash From Continuing Operations
Net Cash From Discontinued Operations
Cash Provided By Investing Activities
Net Cash From Total Operating Activities
Sale of Property, Plant & Equipment
Sale of Short-Term Investments
Purchases of Property, Plant & Equipment
Acquisitions
Cash Provided by Financing Activities
Net Cash From Investing Activities
Issuance of Debt
Cash Used for Financing Activities
Issuance of Capital Stock
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Payment of Cash Dividends
(829.00)
(674.00)
(58.00)
443.00
(4,860.00)
(3,460.00)
0.00
0.00
(38.00)
(14.00)
Other Financing Charges, Net
Net Cash From Financing Activities
11
Effect of Exchange Rate Changes
Net Change in Cash & Cash Equivalents
* http://www.motleyfool.idmanagedsolutions.com/stocks/income_statement.idms?SYMBOL_US=CVS&TIME=
Calculation and Analysis of 12 Financial Ratios of CVS Caremark
Table 4.
12 financial ratios of CVS in 2012.
Ratios
Current Ratio
Figures in millions
Calculations
current assets
current liabilities
Debt Ratio
current assets-inventory
current liabilities
total liabilities
total assets
Debt-to-Equity Ratio
total debt
shareholder equity
Quick Ratio
Times-Interest-Earned
Ratio (TIE Ratio)
Inventory Turnover Ratio
EBIT
interest expense
net revenue
inventory
CVS 2012
19852/13790 = 1.44
(1357+6473)/13790 = 0.57
23208/65912 = 0.43
5828/37704 = 0.26
6880/557 = 12.4
123133/10759 = 11.44
Total Assets Turnover
total revenue
total assets
123133/65912 = 1.87
Return on Sales (ROS)
operating profit
(
) *100
total sales
(7228/123133)*100 = 5.87%
Return on Total Assets
(ROA)
annual net income
average total sales
3877/65912 = 5.88%
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
12
Return on Total Equity
(ROE)
net income
(
) x 100
total shareholder equity
Earnings Per Share(EPS)
net earnings
outstanding shares
3882/1271 = 3.05
Price/Earnings Ratio (P/E
Ratio)
market value per share
earnings per share
51.12/3.05 = 16.76
(3877/37704)*100 = 10.82%
Financial ratios are used to evaluate the financial strength of a company as well as
evaluate the profitability, risk, and growth of the company. Ratios give people an idea on the
financial stability of a company, how it compares to its competitors, and allows investors to
make a decision on whether to invest in the company stock. The ratios used to determine the
company’s worth are current ratio, quick ratio, debt ratio, debt-to-equity ratio, times interest
earned ratio, inventory turnover ratio, total assets turnover, return on sales, return on total assets,
return on total equity, earnings per share, and price/earnings ratio.
Current ratio identifies the company’s liquidity, which is obtained by dividing the current
assets to its current liabilities (Hawawini & Viallet, 2011). The concept behind this ratio is to
“ascertain whether a company’s short-term assets are readily available to pay off its short-term
liabilities” (Investopedia, 2013, para. 2). “The larger the current ratio, the more liquid the firm
and that the current ratio should be at least greater than one and preferably close to two”
(Hawawini & Viallet, 2011, p. 85). In table 4, it shows that CVS had a current ratio of 1.44 in
2012. According to the recommendation from Hawawini and Viallet (2011), CVS is in good
standing to pay short-term liabilities with its short-term assets due to the ratio being greater than
one and being closer to two.
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Quick ratio is a measurement of “the most liquid current assets there are to cover current
liabilities. It excludes inventory and other current assets which are more difficult to turn into
cash” (Investopedia, 2013, para. 1). Quick ratio can be calculated by adding cash plus accounts
receivable divided by current liabilities. While the current ratio and quick ratio are similar in
their concepts, quick ratio removes the inventories from the current asset so one could see the
more-liquid assets. In table 4, it shows that CVS had a quick ratio of 0.57 in 2012. Since the
CVS current ratio is significantly higher than the quick ratio, it signifies that CVS is dependent
on inventory.
Debt ratio is a “measure of the amount of debt that the company has on its balance sheets
compared to its assets” (Investopedia, 2013, para. 3). Debt ratio is calculated by the total
liabilities divided by total assets. Debt ratio will provide how much leverage the company has as
well as how risky the company is operating. In table 4, it shows that CVS had a debt ratio of 0.43
in 2012. The higher the debt ratio the more dependency CVS has on leverage (money borrowed
and owed). “Generally, large, well-established companies can push the liability component of
their balance sheet structure to higher percentages without getting into trouble” (Investopedia,
2013, para. 3).
Debt-to-equity ratio is “a measurement of how much suppliers, lenders, creditors and
obligors have committed to the company versus what the shareholders have committed”
(Investopedia, 2013, para. 1). Debt-to-equity ratio is calculated by total debt divided by
shareholder equity. Debt-to-equity ratio provides another way to look at the company’s leverage.
In table 4, it shows that CVS had a debt-to-equity ratio of 0.26 for 2012. Since CVS has a higher
debt ratio compared to the debt-to-equity ratio it shows that the equity holders have more worth
in the company then the creditors.
13
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Times interest earned ratio is calculated by using earnings before interest and tax divided
by interest expense. This ratio is used to indicate “how many times the firm’s pre-tax operating
profit covers its interest expenses” (Hawawini & Viallet, 2011, p. 152). In table 4 CVS has a
times interest earned ratio of 12.4 in 2012. The higher this ratio the more this value tells
consumers that CVS has ability to meet its interest payments. CVS is in good position to meet
these interest payments.
Inventory turnover ratio “measures company’s ability to sell and replace its inventory”
(CSIMarket, n.d., para. 1). Inventory turnover ratio is calculated by obtaining the net revenue
and dividing it by inventory. In table 4 CVS reported an inventory turnover ratio of 11.44 in
2012. CVS is well positioned and indicates that it is able to sell its inventory as opposed to
having overstock of inventory.
Total assets turnover is “the amount of sales generated for every dollar's worth of assets”
(Investopedia, 2013, para. 1). This ratio is found by taking total revenue and dividing by total
assets. The purpose of this ratio is to show whether companies are growing in revenue proportion
to their sales. In table 4 CVS shows a total asset turnover of 1.87 in 2012. CVS ended 2012 in
good position with its total asset turnover ratio. The higher the ratio the more a company is
identified at being efficient with using assets to gain in sales or revenue.
Return on sales “measures the profit generated by one dollar of sales” (Hawawini &
Viallet, 2011, p. 144). Return on sales is also known as the operating profit margin. This ratio is
found by taking operating profit divided by total sales and times it by 100. In table 4 CVS shows
a return on sales of 5.87% in 2012. CVS is ranked #2 in the industry on achieving a satisfactory
return on sales (CSIMarket, n.d.). This ratio is best reviewed over time to look at trends within
the company or to compare with other companies in the same industry. An increasing ratio
14
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
would indicate that the company is getting more efficient while a decreasing ratio would indicate
financial risk. Ratios do vary depending on the industry.
Return on assets is a ratio that shows how a company is managing its assets to make a
profit (Hawawini & Viallet, 2011). The return on assets is found by taking the annual net income
and dividing it average total sales. “As a rule of thumb, investment professionals like to see a
company's ROA come in at no less than 5%” (Investopedia, 2013, para. 7). From table 4 we can
conclude that CVS is well managed with its assets and made a profit in 2012 due to the ratio
resulting in 5.88%.
Return on equity “measures how much the shareholders earned for their investment in the
company. The higher the ratio percentage, the more efficient management is in utilizing its
equity base and the better return is to investors” (Investopedia, 2013, para. 1). The return on
equity is found by taking net income and dividing it by total shareholder equity and times it by
100. Table 4 finds CVS was at 10.82% in 2012 for their return on equity. CVS fell in the middle
of the pack of pharmaceutical retailers having a good return on equity. CVS placed 5th out of 13
in the industry (Ycharts website, 2013).
Earnings per share determine a share’s price and is also an indicator of the company’s
profitability (Investopedia, 2013). Earnings per share is found when taking the net earnings and
dividing it by the outstanding shares. In Table 4 CVS had an earnings per share of $3.05 in 2012.
The higher the earnings per share the more profitable the company. CVS is favorable with its
earnings per share for 2012.
Price/earnings ratio is “a valuation ratio of a company's current share price compared to
its per-share earnings” (Investopedia, 2013, para. 1). A price/earnings ratio is found by taking
the market value per share and dividing it by earnings per share. In Table 4 CVS has a
15
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
16
price/earnings ratio of 16.76 in 2012. The higher the price/earnings ratio “means that investors
in the market are assigning higher values to each dollar of current earnings per share generated
by the firm” (Hawawini & Viallet, 2011, p. 159). Since CVS does have a price/earnings ratio, it
signifies that they are not losing money. Price/earnings ratio cannot be looked at alone as it does
not provide the whole story. It is best to compare ratios of previous years in the company or
compare to competitors in the same industry.
CVS CareMark Trend Analysis
Table 5
12 Ratios of CVS CareMark for past three years
Ratios
Calculations
2010
2011
2012
Current Ratio
current assets
current liabilities
1.60
1.56
1.44
Quick Ratio
current assets-inventory
current liabilities
0.57
1.56
0.64
Debt Ratio
total liabilities
total assets
0.39
0.62
0.43
Debt-to-Equity
Ratio
total debt
shareholder equity
0.27
0.41
0.26
Times-InterestEarned Ratio
(TIE Ratio)
EBIT
interest expense
11.4
0.26
12.4
Inventory
Turnover Ratio
net revenue
inventory
9.00
10.7
11.44
Total Assets
Turnover
total revenue
total assets
1.55
1.66
1.87%
Return on Sales
(ROS)
operating profit
(
) *100
total sales
6.39
5.91
5.87
Return on Total
Assets (ROA)
annual net income
average total sales
5.51
5.36
5.88%
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
17
net income
) x 100
total shareholder equity
9.09
9.1
10.82%
Earnings Per
Share(EPS)
net earnings
outstanding shares
2.51
2.6
3.05
Price/Earnings
Ratio (P/E
Ratio)
market value per share
earnings per share
13.17
17.03
16.76
Return on Total
Equity (ROE)
(
Figure 1. CVS Caremark’s financial ratios trend for the years 2010, 2011 and 2102.
14
12
10
8
2010
6
2011
2012
4
2
0
Current Ratio Quick Ratio
Debt Ratio
Debt/Equity
Ratio
TIE Ratio
Inventory
Turnover
Ratio
3-Year CVS Caremark Financial Ratios (1-6)
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
18
Figure 2. CVS Caremark’s financial ratio trend for years 2010, 2011, 2012
18
16
14
12
10
2010
8
2011
6
2012
4
2
0
Total Assets
Turnover
ROS
ROA
ROE
EPS
P/E Ratio
3-Year CVS Caremark Financial Ratios (7-12)
CVS Caremark Corp, also known as CVS in the New York Stock Exchange (NYSE), “is
the largest pharmacy provider in the United States with integrated offerings across the entire
spectrum of pharmacy care”. It is considered number one as the largest U.S. Pharmacy, based on
total prescriptions filled (www.info.cvscaremark.com). According to the 2012-2013 Economic
Report on Retail, Mail and Specialty Pharmacies, CVS’ pharmacy revenue accounted for 22.8%
of the nation’s total prescription revenue in 2012. (www.info.cvscaremark.com).
CVS, based on market reports and trends is viable financially. Its financial ratio is
supportive of the growth and profitability that the company experienced especially during the
last 3 years since 2010 (www.financials.morningstar.com/ratios).
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Financial ratios are financial analysis comparisons that indicate each of the financial statement
item’s logical interrelationships. It also provides a picture of the company’s strengths and
weaknesses, their competitive position and overall financial structure
(www.businessdictionary.com). The company appears to be status quo in most of its ratios in the
last 3 years but has seen an upward trend for the year 2012 in the following areas: Times-Interest
Earned Ratio (TIE Ratio), Inventory Turnover Ratio, Return on Total Equity (ROE) and Price
Earnings Ratio (P/E Ratio).
CVS’ Current Ratio for the past 3 years, though in the downward trend remain above 1
for those 3 years. The company has shown efficiency in paying short-term obligations by quick
product turnover to cash.
The company’s Quick Ratio (QR) has seen an upward/downward movement in the past 3
years. CVS was in a better position in 2011 in meeting their financial obligations with a QR of
0.62 compared to 0.57 in the years 2010 and 2012.
CVS’ Debt Ratio was on the uphill the past 3 years, though consistently less than 1. This
indicates that the company has more assets than debts. This ratio is also a good indicator of risk
level. In this case, an investment in CVS is less risky the past 3 years.
Their Debt Equity Ratio for the past 3 years was almost constant. It is on the low-end
proportion of equity and debt. This is indicative that the company is conservative when it comes
to company growth and the amount of debt.
Ties-Interest Earned Ratio (TIE Ratio) also referred to as interest coverage ratio and
fixed-charged coverage is a metric used to measure a company’s ability to meet its debt
obligations. It is calculated by dividing the company’s earnings before interests and taxes (EBIT)
19
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
20
by the total interest payable on bonds and other contractual debt (www.investopedia.com). In
2012, CVS’ TIE Ratio is at 12.4, which is a 1.6 increase from the previous year of 10.8,
indicative of the company’s increasing ability to sustain earnings.
Figure 3. Amount of Debt for CVS in Year 2010, 2011, 2012
Amount of Debt
10100
10050
10000
9950
9900
Amount of Debt
9850
9800
9750
9700
2010
2011
2012
It is also indicative of how many times the company’s pre-tax operating profit (EBIT) covers its
interest expenses (Hawawini & Viallet, 2011, p. 152) Inability to cover interest charges may lead
a company to bankruptcy. CVS Caremark Corporation has less than 13% chance of experiencing
financial distress in the next 2 years of operation (www.macroaxis.com). The company’s total
debt equal to 10,014 in 2011 and 9,828 in 2012. Based on CVS’ higher TIE ratio and decreased
debt in 2012 compared to 2011, CVS may be paying too much debt, money that could be used
for projects.
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Inventory Turnover Ratio is a ratio showing how many times a company’s inventory is
sold and replaced over a period. It is calculated by dividing the cost of goods sold (COGS) by the
ending inventories (www.investopedia.com). In 2012, CVS’ Inventory ratio was 11.44, a 2.44
mark up from 2 years prior and 0.74 increase in the year before. This means that in 2012, items
in CVS’ inventory turned over 11 times per year or a little over 1 month stay in the warehouse.
Figure 4. CVS Inventory Ratio 3-Year Comparison
2012
Inventory Turnover Ratio
2011
Days in Warehouse
2010
0
2
4
6
8
10
12
14
The graph shows how the ratio improved overtime indicating the efficiency of how CVS
managed its inventories in 2012. The increasing ratio is also indicative of increasing sales. CVS’
sales in 2012 increased by 15.3 million compared to 2011 sales.
CVS’ Total Assets Turnover Ratio increased from 1.55 in 2010 to 1.87 in 2012. This
indicates positive sales for the company. Their revenue is growing in relation to growing sales.
In 2012, the profit margin of the company is less as shown by its higher ratio.
21
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
The company’s Return on Sales showed decline from 2010 to 2012, indicative of
decreasing profit being produced by the sales of goods. Decline is a signal of looming financial
state, however, in order to get a better understanding of the company’s financial state, it is best to
watch this ratio’s trend overtime and against other companies.
CVS’ Return on Assets/Investment showed a 0.52% increase from 2011 to 2012. This
data indicates that CVS is efficiently managing its assets to increase earnings. A high ROA/ROI
is a positive indicator of increasing earning by using relative low amount of investment.
Return on Total Equity (ROE), also known as return on net worth is the amount of net
income returned as a percentage of shareholders equity. It measures a corporation’s profitability
by revealing how much profit a company generates with the money shareholders have invested
(www.investopedia.com). CVS is on the right financial path when it comes to ROE. The last 3
years trended in the upward swing increasing by about 1.72 percent in profit from previous
years. It is a sign of growth for CVS. The recommendation however, is to look at 5-10 years’
worth of value in order to get a true picture of growth.
22
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
23
Figure 5. CVS Return on Equity 3-Year Comparison
ROE
2012
2011
ROE
2010
8
8.5
9
9.5
10
10.5
11
The company’s Earnings per Share have shown a 0.54 growth from 2010 to 2012. The
increase is good because the company’s profitability also increased, indicating a sound thriving
company. This ratio determines the company’s share price in the market.
Price Earnings Ratio (P/E Ratio) also known as price multiple or earnings multiple is a
valuation ratio of a company’s current share price compared to its per share earnings
(www.investopedia.com).
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
24
Figure 6. CVS Price Earnings Ratio 3-Year Comparison
2012
P/E Ratio
2011
Earnings/Share
2010
0
5
10
15
20
The higher P/E Ratio in 2011 as shown above indicates that CVS’ investors are assigning
higher values to each dollar of current earnings per share generated by the company (Hawawini
& Viallet, 2011, p. 159). P/E Ratio is dependent on the company’s share price as determined by
the market (p. 402). In 2011, CVS’ P/E Ratio of 17.03 indicates that its shares were trading at a
price equal to 17.03 times the company’s most recent earnings per share (EPS). The higher the
ratio, the higher the earnings.
Overall, CVS’ financial position in the business world is a sound one. Its market share
price had gone up since this group officially decided to use CVS as our company of choice. The
increase of 0.47% was as of 5-17-2013.
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
25
Comparison of Financial Ratio for CVS, Walgreen and RiteAid in 2012
Table 5
Comparison of 12 Financial Ratios for CVS, Walgreen and RiteAid
Ratios
Calculations
CVS
Walgreens
Rite Aid
Current Ratio
current assets
current liabilities
1.44
1.23
1.75
Quick Ratio
current assets-inventory
current liabilities
0.64
0.43
0.46
Debt Ratio
total liabilities
total assets
0.43
0.46
1.35
Debt-to-Equity
Ratio
total debt
shareholder equity
0.26
0.30
-2.26
Times-InterestEarned Ratio
(TIE Ratio)
EBIT
interest expense
12.4
39.4
0.26
Inventory
Turnover Ratio
net revenue
inventory
11.44
10.18
8.32
Total Assets
Turnover
total revenue
total assets
1.87%
2.14%
3.55
Return on Sales
(ROS)
operating profit
(
) *100
total sales
5.87%
28.4%
0.62%
Return on Total
Assets (ROA)
annual net income
average total sales
5.88%
6.36%
-0.05
net income
) x 100
total shareholder equity
10.82%
11.66%
-13.3%
Earnings Per
Share(EPS)
net earnings
outstanding shares
3.05
2.25
-0.43
Price/Earnings
Ratio (P/E
Ratio)
market value per share
earnings per share
16.76
15.9
-7.1
Return on Total
Equity (ROE)
(
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
Peer Group Analysis
The current ratio between the three companies shows that they are in good
standing to pay short-term liabilities and Rite Aid is actually more favorable by being closer to
the ratio of two. With the current ratio being higher than the quick ratio we can see that these
companies are dependent on inventory. The companies are comparable and satisfactory with
having liquid current assets to cover current liabilities. The debt ratio is the amount of debt
compared to assets on the balance sheets. With Rite Aid having a higher debt ratio this tells us
that they are dependent mostly on money borrowed and owed. CVS and Walgreens are
comparable and stable with their debt ratio. Debt-to-equity ratio shows a measurement in
leverage vs. shareholder commitment to the company. CVS and Walgreens are similar with their
debt-to-equity ratio meaning that their equity holders have more hand in the company then the
creditors. Rite Aid on the other hand has a negative debt-to-equity ratio in which the creditors
have more at stake with the company. When it comes to times-interest-earned ratio we see that
Walgreens has a better position to meet interest payments while Rite Aid displays an at risk ratio
to be able to pay interest payments. For inventory turnover ratio, the three companies reflect that
they have the capability to sell and replace their inventory. For total assets turnover we see that
Walgreens and Rite Aid have a better advantage to be efficient with assets to grow sales.
Walgreens did end their fiscal year with being on top in return on sales ratio compared to CVS
and Rite Aid. The higher the ratio the more profit per each dollar of sales. With return on assets
ratio CVS and Walgreens top Rite Aid by having the higher ratios and indicating that they are
managing assets better to make a profit. Return on equity shows how much shareholders earned
from the company. CVS and Walgreens were able to provide a return of investment for their
shareholders but Rite Aid being in the negative did not earn money for their shareholders. The
26
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
earnings per share ratio showed that CVS was more profitable among the two other competitors.
Rite Aid is at risk with earnings per share ratio of -0.43 as this indicates that they are not making
profit. For price/earnings ratio we see that CVS and Walgreens are comparable in that their
investors have more value per share by the company. Unfortunately, Rite Aid is not favorable
when it comes to investors share value.
Analysis of CVS Caremark’s Financial Performance
Upon evaluation of the financial documentation of CVS CareMark, the organization
appears financially sound. Ten of the twelve ratios reviewed indicate that CVS holds a
financially favorable position. The retail industry is heavily reliant on inventory, so one would
expect the quick ratio being significantly less than the current ratio. The inventory is managed
well and overstock is avoided as evidenced by the inventory turnover ratio. The evaluation of
the efficiency ratios of inventory turnover ratio and total asset turnover are also favorable. The
return on sales has shown a decline over the past three years, which could indicate a decline in
efficiency. This would be one area to monitor over time. Overall, CVS is a strong competitor in
its market.
What CVS Could Have Done Differently?
Overall, it appears that CVS has made good financial decisions and has established itself
as a leader in their industry. They have shown continued improvement based on their financial
ratios which makes it difficult to determine what they should have done differently. However,
based on these financial ratios there are two areas in which the company could have improved or
done differently. The one area is in relation to its current ratio. Since 2010, CVS’s current ratio
had declined from 1.60 to 1.44 in 2012. In order to improve current ratio CVS would need to
27
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
either increase current assets or decrease current liabilities. This could be accomplished by
looking at overhead, unproductive assets and accounts receivable and payable.
The other item that could be looked at as an opportunity is the company’s return on
equity (ROE). CVS’s ROE has steadily increased from 9.09% in 2010 to 10.82% in 2012, which
is good. However, in comparison to other companies, CVS has opportunity to improve even
more. This could be accomplished by focusing “on improving and widening their margins by
increasing their return on sales” (www.smallbuisness.chron.com). Another way that this can be
accomplished is by increasing asset turnover.
Recommendations on the Company’s Global Business Strategy in Next Three Years
Based on the Financial Ratios comparison done earlier in this paper, against the
company’s competitors, Walgreens and Rite Aid, CVS Caremark is a very viable company
financially. The future of this company is reflective of the trends in the past 3 years. The
company’s strategy in positioning itself in the market is sufficient and appropriate. The
management’s efficiency in balancing profitability, revenue and growth contributes to the market
position they are in now. Though not too aggressive with their growth, and debt handling, the
company still manage to generate earnings using its assets and inventories without using most of
its investments.
One recommendation, based on its high Ties-Interest Earned (TIE) Ratio and decreased
amount of debt in 2012, CVS appears to be paying off too much debt. The dollars allocated in
paying off debt could be re-invested for a revenue-producing project. In May 2013, CVS
launched “Total Home” product line, a homecare line of goods that includes more than 150
different items such as cooking, cleaning and organization products, as well as bath tissue, paper
28
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
towels, trash bags, light bulbs among other things (www.pbn.com). This move could have been
the result of the above findings.
Overall, CVS Caremark needs to continue their present approach of the market. The
company is headed in the right direction strategically and financially, leaving their competitors
behind by a great margin.
29
COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK
References
Hawawini, G., & Viallet, C. (2011). Finance for executives: Managing for value creation (4th
ed.). Mason, OH: South-Western Cengage Learning.
Investopedia. (2013). http://www.investopedia.com/university/ratios/liquiditymeasurement/ratio1.asp
Ycharts website. (2013). http://ycharts.com/companies/CVS/return_on_equity
30