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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