Final Business Report
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finance_report_2.docxRATIO ANALYSIS OF CVS AND WALGREEN FOR THE YEAR 2004 1
Running Head: RATIO ANALYSIS OF CVS AND WALGREEN FOR THE YEAR 2014 12
Ratio Analysis of CVS and Walgreens for the Year 2014
Walgreens Ratio Analysis
Current Ratio
=current assets/current liabilities
=12,242/8,895
=1.38 times
The current ratio helps investors and creditors understand the liquidity of a company and how easily that company will be able to pay off its current liabilities. This ratio expresses a firm's current debt in terms of current assets. So a current ratio of 1.38 means that the Walgreen Company has 1.38 times more current assets than current liabilities. A higher current ratio is always more favorable than a lower current ratio because it shows the company can more easily make current debt payments. The current ratio of Walgreen is less favorable than CVS.
Quick Ratio
= (cash +accounts receivables/current liabilities
= (2,646+3,218)/8895
=0.66 times
The acid test ratio measures the liquidity of a company by showing its ability to pay off its current liabilities with quick assets. If a firm has enough quick assets to cover its total current liabilities, the firm will be able to pay off its obligations without having to sell off any long-term or capital assets, A ratio of 0.66 shows that the company has 0.66 times as many quick assets than current liabilities which is not bad.
Inventory Turnover
=cost of sales/inventory
54,823/6076
=9.02 times
Inventory turnover is a measure of how efficiently a company can control its merchandise, so it is important to have a high turn. This shows the company does not overspend by buying too much inventory and wastes resources by storing non-salable inventory. It also shows that the company can effectively sell the inventory it buys. For the case of Walgreen it shows that the company sells inventory nine times it purchase. This is less favorable when compared to CVS.
Receivables Turnover
= net credit sales/average trade receivables
=76,392/3218
=2 3.74
This ratio measures a business' ability to efficiently collect its receivables it only makes sense that a higher ratio would be more favorable. Higher ratios mean that companies are collecting their receivables more frequently throughout the year. Walgreen has a ratio of 23.74 means that the company collected its average receivables about twenty four times during the year. Higher efficiency is favorable from a cash flow standpoint as well. If a company can collect cash from customers sooner, it will be able to use that cash to pay bills and other obligations sooner. Thus this is good for Walgreen.
Days sales outstanding
= (accounts receivables/net credit sales)*365
= (3218/76,392)*365
=15.38 days
This formula shows investors and creditors how well companies' can collect cash from their customers. This ratio measures the number of days it takes a company to convert its sales into cash. A lower ratio is more favorable because it means companies collect cash earlier from customers and can use this cash for other operations. It also shows that the accounts receivables are good and won't be written off as bad debts. For Walgreen it means the company takes 15.38 days to collect cash of which it is more favorable when compared with CVS.
Fixed Asset Turnover
=net revenue/average fixed assets
=76392/12257
=6.23 times
This measures how successfully a company is utilizing its fixed assets in generating revenue. It calculates the dollars of revenue earned per one dollar of investment in fixed assets. A higher fixed asset turnover ratio is generally better. Thus for Walgreen means every fixed asset generates 6.23 times or dollars, thus this is healthier in Walgreen than in CVS .Hence more efficient.
Total Asset Turnover
=net sales revenue/average total assets
=76,392/37182
=2.05 times
This is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. A lower ratio indicates that the firm is sluggish.
Gross Profit margin
= Gross profit/Revenue*100%
= (21,569/76392)*100%
=28.23%
Gross margin ratio is a profitability ratio that measures how profitable a company can sell its inventory. It only makes sense that higher ratios are more favorable. Higher ratios mean the company is selling their inventory at a higher profit percentage. 28.23% margin in Walgreen means the company is selling their inventory at this percentage.
Operating Profit margin
= (operating Income/revenue)*100
=4,194/76392*100
=5.5%
The operating profit margin ratio is a key indicator for investors and creditors to see how businesses are supporting their operations. If companies can make enough money from their operations to support the business, the company is usually considered more stable. On the other hand, if a company requires both operating and non-operating income to cover the operation expenses, it shows that the business' operating activities are not sustainable. A higher operating margin is more favorable compared with a lower ratio because this shows that the company is making enough money from its ongoing operations to pay for its variable costs as well as its fixed cost, 5.5% is more favorable than for CVS which slightly lower.
Net Profit margin
=net earnings attributable to Walgreen/net sales*100%
=1,932/76392*100%
=2.53%
The Net profit margin ratio directly measures what percentage of sales is made up of net income. In other words, it measures how much profits are produced at a certain level of sales. A higher margin is normally preferable and most favorable. 2.53% for Walgreen is lower than 3.36% for CVS, thus the margin for CVS is more favorable than for Walgreen. Because it shows CVS manages its expenses well and Walgreen needs to improve on that.
Return on Assets
=net earnings attributable to Walgreen/ total assets
= (1,932/37,182)*100%
=5.2%
The return on assets ratio measures how effectively a company can turn earns a return on its investment in assets. It shows how efficiently a company can convert the money used to purchase assets into net income or profits. Since all assets are either funded by equity or debt,
Some investors try to disregard the costs of acquiring the assets in the return calculation by adding back interest expense in the formula. It only makes sense that a higher ratio is more favorable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income.
Return on Equity
=net earnings attributable to Walgreen/share holders equity
= (1,932/20,457)*100%
=9.44%
Return on equity measures how efficiently a firm can use the money from shareholders to generate profits and grow the company. Unlike other return on investment ratios, ROE is a profitability ratio from the investor's point of view—not the company. In other words, this ratio calculates how much money is made based on the investors' investment in the company, not the company's investment in assets
or something else
Debt/Net Worth
=net after tax profits/ (share holders capital + retained earnings
=1,932/20,457
=0.09
The ratio is useful as a measure of how well a company is utilizing the shareholder investment to create returns for them, and can be used for comparison purposes with competitors in the same industry
Debt Ratio
=total debt/total assets
= (8,895+7,726)/37,182
=16,621/37,182
=0.45
A lower debt ratio usually implies a more stable business with the potential of longevity because a company with lower ratio also has lower overall debt. Each industry has its own benchmarks for debt, but .5 is reasonable ratio, thus for Walgreen 0.45 is favorable.
Times Interest Earned ratio
= earnings before interest and taxes/interest expenses
=4,194/156
=26.88 times
The times interest ratio is stated in numbers as opposed to a percentage. The ratio indicates how many times a company could pay the interest with it’s before tax income, so obviously the larger ratios are considered more favorable than smaller ratios. In other words, a ratio of 26.88 means that Walgreen Company makes enough income to pay for its total interest expense 26.88 times over.
CVS Ratio Analysis
Current Ratio
=current assets/current liabilities
=20.6/30.3
=0.68 times
The current ratio helps investors and creditors understand the liquidity of a company and how easily that company will be able to pay off its current liabilities. This ratio expresses a firm's current debt in terms of current assets. So a current ratio of .68 means that the Walgreen Company has .68 times more current assets than current liabilities. A higher current ratio is always more favorable than a lower current ratio because it shows the company can more easily make current debt payments. In comparison with CVS, CVS state is more favorable than Walgreen’s because the current ratio of the latter is lower.
Quick Ratio
= (cash +accounts receivables/current liabilities
= (2.2+13.8)/30.3
=0.53 times
The Quick ratio measures the liquidity of a company by showing its ability to pay off its current liabilities with quick assets. According to Kimmel( 2008, page128) If a firm has enough quick assets to cover its total current liabilities, the firm will be able to pay off its obligations without having to sell off any long-term or capital assets, a ratio of 0.53 shows that the company has 0.53 times as many quick assets than current liabilities.
Inventory Turnover
=cost of sales/inventory
=96.3/4.6
=20.93 times
Inventory turnover is a measure of how efficiently a company can control its merchandise, so it is important to have a high turn. This shows the company does not overspend by buying too much inventory and wastes resources by storing non-salable inventory. It also shows that the company can effectively sell the inventory it buys. For the case of Walgreen it shows that the company sells inventory nine times it purchase. This is more favorable for CVS than in Walgreen.
Receivables Turnover
= net credit sales/average trade receivables
=142.9/13.8
=10.36 times
This ratio measures a business' ability to efficiently collect its receivables it only makes sense that a higher ratio would be more favorable. Higher ratios mean that companies are collecting their receivables more frequently throughout the year. CVS has a ratio of 10.36 means that the company collected its average receivables average of ten times during the year. Higher efficiency is favorable from a cash flow standpoint as well. If a company can collect cash from customers sooner, it will be able to use that cash to pay bills and other obligations sooner.
Days sales outstanding
= (accounts receivables/net credit sales)*365
= (13.8/142.9)*365
=35.25days
This formula shows investors and creditors how well companies' can collect cash from their customers. This ratio measures the number of days it takes a company to convert its sales into cash. A lower ratio is more favorable because it means companies collect cash earlier from customers and can use this cash for other operations. It also shows that the accounts receivables are good and won't be written off as bad debts. For Walgreen it means the company takes 35.25 days to collect cash. In comparison with Walgreen, CVS is less favorable because it takes longer for cash to be collected.
Fixed Asset Turnover
=net revenue/average fixed assets
=142.9/74.5
=1.92 times
This measures how successfully a company is utilizing its fixed assets in generating revenue. It calculates the dollars of revenue earned per one dollar of investment in fixed assets.
A higher fixed asset turnover ratio is generally better. 1.92 times for CVS it utilizes its fixed assets to generate 1.92 times more dollars.
Total Asset Turnover
=net sales revenue/average total assets
=142.9/95.1
=1.5 times
This is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. A lower ratio indicates that the firm is sluggish.
Gross Profit margin
= Gross profit/Revenue*100%
= (4.8/142.0)*100%
= 32.61%
Gross margin ratio is a profitability ratio that measures how profitable a company can sell its inventory. It only makes sense that higher ratios are more favorable. Higher ratios mean the company is selling their inventory at a higher profit percentage. 32.61% margin for CVS means the company is selling their inventory at this percentage, thus more favorable than the margin for Walgreen.
Operating Profit margin
= (operating Income/revenue)*100
=7.5/142.9*100
=5.24%
The operating profit margin ratio is a key indicator for investors and creditors to see how businesses are supporting their operations. If companies can make enough money from their operations to support the business, the company is usually considered more stable. On the other hand, if a company requires both operating and non-operating income to cover the operation expenses, as explained by Bragg, (2012 page 81) it shows that the business' operating activities are not sustainable. A higher operating margin is more favorable compared with a lower ratio because this shows that the company is making enough money from its ongoing operations to pay for its variable costs as well as its fixed cost, CVS 5.24% is not bad as such but Walgreen’s 5.5% is more favorable.
Net Profit margin
=net earnings attributable to CVS/net sales*100%
=4.8/142.9*100%
=3.36%
The Net profit margin ratio directly measures what percentage of sales is made up of net income. In other words, it measures how much profits are produced at a certain level of sales. A higher margin is normally preferable and most favorable, when compared to Walgreen, 2.83%, CVS is more favorable because it shows good management of expenses.
Return on Assets
=net earnings attributable CVS/ total assets
= (4.8/95.1)*100%
=5.05%
The return on assets ratio measures how effectively a company can turn earns a return on its investment in assets. It shows how efficiently a company can convert the money used to purchase assets into net income or profits. Since all assets are either funded by equity or debt, some investors try to disregard the costs of acquiring the assets in the return calculation by adding back interest expense in the formula. It only makes sense that a higher ratio is more favorable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income.
Return on Equity
=net earnings attributable CVS/share holders equity
= (4.8/31.2)*100%
=15.38%
Return on equity measures how efficiently a firm can use the money from shareholders to generate profits and grow the company. Unlike other return on investment ratios, ROE is a profitability ratio from the investor's point of view—not the company. In other words, this ratio calculates how much money is made based on the investors' investment in the company, not the company's investment in assets or something else. So for CVS it shows that based on investment in the company, money is generated at a rate of 15.38%.
Debt/Net Worth
=net after tax profits/ (share holders capital + retained earnings)
=4.8/ (31.2+82.6)
=4.8/113.8
= 0.42
The ratio is useful as a measure of how well a company is utilizing the shareholder investment to create returns for them, and can be used for comparison purposes with competitors in the same industry
Debt Ratio
=total debt/total assets
=63.9/95.1
=0.67
A lower debt ratio usually implies a more stable business with the potential of longevity because a company with lower ratio also has lower overall debt. Each industry has its own benchmarks for debt, but .5 is reasonable ratio, thus for CVS 0.6 is not healthy for the business as compared to that for Walgreen.
Times Interest Earned Ratio
= Earnings before interest and taxes/interest expenses
=6.3/1.2
=5.25
The times interest ratio is stated in numbers as opposed to a percentage. The ratio indicates how many times a company could pay the interest with it’s before tax income, so obviously the larger ratios are considered more favorable than smaller ratios. In other words, a ratio of 5.25means that a company makes enough income to pay for its total interest
