Walgreens vs. CVS financial analysis:
- Calculate the following ratios and filled in the worksheet for ratios. You must show your work.
*(I show all my work for my answers in highlight for each question, and then I put all the answers in the Ratio Table on the last page)*
LIQUIDITY RATIOS:
Net working capital for Walgreens
Net working capital for CVS
NWC Formula = Current Assets – Current Liabilities
- (Cash + A/R + Inventories + other current assets) – (Short term debt + Trade A/P + Operating Lease obligation + Accrued expenses and other liabilities + Income taxes)
Walgreens NWC (2019) = (1,023 + 7,226 + 9,333 + 1,118) – (5,738 + 14,341 + 0 + 5,474, 216)
= -$7,069 (in millions) = -$7.1 billion
Walgreens NWC (2020) = (516 + 7,132 + 9,451 + 974) – (3,538 + 14,458 + 2,426 + 6,539 + 110)
(If you add all the current liabilities, the total is $27,071, not $27,070. So I am using the correct number, not the one in the 10k)
= -$8,998 (in millions) = -$9 billion
CVS NWC (2018) = (4,059 + 2,522 + 17,631 + 16,450 + 4,581) – (8,925 + 11,365 + 6,147 + 2,939 + 10,711 + 1,937 + 720 + 1,265)
= $1,234 (in millions) = $1.2 billion
CVS NWC (2019) = (5,683 + 2,373 + 19,617 + 17,516 + 5,113) – (10,492 + 13,601 + 6,879 + 2,991 + 12,133 + 1,830 + 1,596 + 3,781)
= -$3,001 (in millions) = -$3 billion
Analysis: What do the results of this calculation mean in the context of Walgreens? In the context of CVS? Compare the two – why are they different? Which is better or worse?
Walgreens’s NWC decreased approximately 27% from 2019 to 2020, mainly due to its overall drop in revenue and new operating lease obligation. CVS’s NWC drastically decreased by approximately 350% from 2018 to 2019, mainly due to increased accrued expenses and all A/P costs. Walgreen’s reason for its decrease in NWC differs from CVS’s reason since Walgreen’s biggest liability increase is in its loan, while CVS has many liability increases stemming from its A/P and accrued expenses. Even though Walgreens’s -$9 billion NWC is lower than CVS’s -$3 billion NWC, I think CVS is worse because they have more areas to address for its drastic increase in current liabilities. Walgreens increased current liabilities simply stem from investing/growing.
Must be at least four sentences for the above analysis.
B. Current ratio for Walgreens
Current ratio for CVS
Current Ratio Formula = Current Assets/Current Liabilities
Walgreens Current Ratio (2019) = 18,700/25,769 = .7257 = 72.57%
Walgreens Current Ratio (2020) = 18,073/27,071 = .6676 = 66.76%
CVS Current Ratio (2018) = 45,243/44,009 = 1.028 = 102.8%
CVS Current Ratio (2019) = 50,302/53,303 = .9437 = 94.37%
What does the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
CVS’s higher current ratio means they have a greater ability to pay its short-term debts with its short-term assets. However, even though CVS’s ratio/percentage is closer to 100% than Walgreens, it does not necessarily mean that CVS is a “healthier” company. In the previous problem, Walgreens’s decrease in NWC was resulted from a loan. Walgreens is taking measures to grow its company. CVS’s decrease in NWC was resulted from many A/P factors, which is more complex than taking out a loan.
C. Quick ratio for Walgreens
Quick ratio for CVS
Quick Ratio Formula = (Current assets – Inventory)/Current liabilities)
Walgreens Quick Ratio (2019) = (1,023 + 7,226 + 1,118)/(5,738 + 14,341 + 5,474 + 216)
= .3635 = 36.35%
Walgreens Quick Ratio (2020) = (516 + 7,132 + 974)/(3,538 + 14,458 + 2,426 + 6,539 + 110)
= .3185 = 31.85%
CVS Quick Ratio (2018) = (4,059 + 2,522 + 17,631 + 4581)/(8,925 + 11,365 + 6,147 + 2,939 + 10,711 + 1,937 + 720 + 1,265)
= .6543 = 65/43%
CVS Quick Ratio (2019) = (5,683 + 2,373 + 19,617 + 5,113)/(10,492 + 13,601 + 6,879 + 2,991 + 12,133 + 1,830 + 1,596 + 3,781)
= .6151 = 61.51%
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
CVS’s higher Quick Ratio means they have a greater ability to meet its short-term financial obligations without relying on the sale of inventory. Instead of focusing on inventory, quick ratio focuses on assets that can be easily converted into cash, which is a more conservative measure of liquidity. CVS is less reliant on its inventories than Walgreens, as CVS’s inventories make up a little over 1/3 (17,516/50,302 = .35 = 35%) of its assets while Walgreens inventories make up approximately 1/2 (9,451/18,073 = .52 = 52%) of its assets. Similar to Current Ratio, 100% or greater is ideal.
PROFITABILITY CALCULATIONS:
D. Gross profit $ and gross profit % for Walgreens
Gross profit $ and gross profit % for CVS
Gross Profit = Total Revenues – COGS
Gross Profit % = (Revenue – COGS)/Revenue
Walgreens Gross Profit and Gross Profit % (2018)
= $30,792 (in millions), so $30.8 billion
= (30,792)/(100,745) = .3056 = 30.56%
Walgreens Gross Profit and Gross Profit % (2019)
= $30,076 (in millions) , so $30.1 billion
= (30,792)/(106,790) = .2883 = 28.83%
Walgreens Gross Profit and Gross Profit % (2020)
= $28,017 (in millions), so $28 billion
= (28,017)/(111,520) = .2512 = 25.12%
CVS Gross Profit and Gross Profit % (2017)
= 184,786 – 153,448 = $31,338 (in millions), so $31.3 billion
= (184,786 – 153,448)/(184,786) = .1696 = 16.96%
CVS Gross Profit and Gross Profit % (2018)
= 194,579 – 156,447 = $38,132 (in millions), so $38.1 billion
= (194,579 – 156,447)/(194,579) = .1960 = 19.6%
CVS Gross Profit and Gross Profit % (2019)
= 256,776 – 158,719 = $98,057 (in millions), so $98.1 billion
= (256,776 – 158,719)/(256,776) = .3819 = 38.19%
What do the results of this calculation mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Gross profit solely focuses on the profitability of its core operating activities relating to its products or services sold. In other words, this metric only accounts for the revenue and costs associated with CVS and Walgreens products and services. Over a three-year period, CVS recorded a bigger total Gross Profit while Walgreens recorded a higher percentage of Gross Profit. CVS’s wider reach of selling its products and services is the result of having a bigger total Gross Profit, while Walgreens was able to manage its COGS more effectively, which resulted in a better percentage of Gross Profit.
SOLVENCY RATIOS
E. Debt ratio for Walgreens
Debt ratio for CVS
Debt Ratio = Total Liabilities/Total Assets
Walgreens Debt Ratio (2019) = (25,769 + 18,700)/(67,598) = .6578 = 65.78%
Walgreens Debt Ratio (2020) = (27,071 + 38,968)/(87,174) = .7576 = 75.76%
CVS Debt Ratio (2018) = (137,913)/(196,456) = .7020 = 70.2%
CVS Debt Ratio (2019) = (158,279)/(222,449) = .7115 = 71.15%
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Debt ratio is a metric to measure how much of the company’s assets are financed by debt. The higher the ratio, the more debt is used. Both CVS and Walgreens have a debt ratio hovering around 70%; however, CVS has a much higher percentage of long-term debt (64,699/158,279 = .4088 = 40.88%) compared to Walgreens (12203/66039 = .1847 = 18.47%). This statistic means that CVS is investing more in its future than Walgreens, whether it loans or lease obligations.
ASSET MANAGEMENT RATIOS
F. Accounts receivable turnover ratio for Walgreens
Accounts receivable turnover ratio for CVS
A/R Turnover ratio = Sales/Receivables
Walgreens A/R Turnover ratio (2019) = (136,866)/(7,226) = 18.94
Walgreens A/R Turnover ratio (2020) = (139,537)/(7,132) = 19.56
CVS A/R Turnover ratio (2018) = (194,579)/(17,631) = 11.04
CVS A/R Turnover ratio (2019) = (256,776)/(19,617) = 13.09
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Walgreens has a higher A/R Turnover Ratio than CVS. A/R Turnover Ratio is a metric to determine how efficient a company is at collecting customer payments. The higher the number, the better, since it means the company is collecting payments quickly. However, if the ratio is too high, that may mean the company is too strict on collecting payment, which may upset customers.
G. Inventory turnover ratio for Walgreens
Inventory turnover ratio for CVS
Inventory Turnover Ratio = COGS/Inventory
Walgreens Inventory Turnover Ratio (2019) = (106,790)/(9,333) = 11.44
Walgreens Inventory Turnover Ratio (2020) = (111,520)/(9,451) = 11.8
CVS Inventory Turnover Ratio (2018) = (156,447)/(16,450) = 9.51
CVS Inventory Turnover Ratio (2019) = (158,719)/(17,516) = 9.06
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
The Inventory Turnover Ratio determines how well a company sells its inventory. The higher the ratio, the more likely a company’s sales are healthy. However, if inventory is being sold too quickly, that may mean they’re underpricing their item, which leaves money on the table. Walgreens has a slightly higher ratio than CVS. It may be the result of offering a better selection of products and services that consumers like more or it could also be that Walgreen’s supply chain is more efficient than CVS.
MARKET ANALYSIS RATIOS
H. Earnings per share for Walgreens
Earnings per share for CVS
(*Basic, not Diluted*)
EPS Formula = (Net income – Preferred Dividends)/(Weighted average number of shares outstanding)
Walgreens EPS (2019) = 4.32
Walgreens EPS (2020) = .52
CVS EPS (2018) = (-596 – 2,038)/(1,044) = -2.52
CVS EPS (2019) = (6,631 – 2,603)/(1,301) = 3.1
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Earnings per share is a metric that measures how much of the company’s profit is attributed to each outstanding share. Investors and analysts closely examine this metric because it’s an effective stat when comparing companies over a period of time. While CVS reported a higher EPS than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, people that are potentially seeking to receive a share of a company’s profits are better suited to investing in Walgreens.
I. Return on Equity for Walgreens
Return on Equity for CVS
ROE Formula = Net income/Total Equity
Walgreens ROE (2019) = (3,962)/(24,152) = .164 = 16.4%
Walgreens ROE (2020) = (424)/(21,136) = .02 = 2%
CVS ROE (2018) = (-596)/(58,543) = -.01 = -1%
CVS ROE (2019) = (6,631)/(64,170) = .103 = 10.3%
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Return on Equity is a metric that measures how well a company generates its profits from its shareholders’ money invested in the business. The higher the number, the better a company creates value from its shareholders’ investment. While CVS reported a higher ROE than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, Walgreens manages its equity capital better than CVS.
J. Market Cap for Walgreens
Market Cap for CVS
Market Cap Formula = Most recent share price * total number of shares outstanding
(*I’m using the closing share price on Dec. 30, 2019 – last market day of 2019)
Walgreens Market Cap (2019) = $52.33 billion
Walgreens Market Cap (2020) = $34.45 billion
CVS Market Cap (2018) = $84.84 billion
CVS Market Cap (2019) = $96.72 billion
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
Market Cap is a metric that measures the total value of a company’s share at a given time multiplied by the total shares outstanding. Market Cap helps investors and analysts determine how big a company is. So, the larger the market cap, the more established the company is. If people want to put their money towards a “blue chip stock,” or a well-established company, this is usually a good indicator. Whether it is the customer experience, products and services offered, or the number of locations, CVS has a much greater Market Cap, which symbolizes that its overall presence is bigger than Walgreens.
I. Free Cash Flow for Walgreens
Free Cash Flow for CVS
FCF Formula = Operating Cash Flow – Capital Expenditure (Investing activiities)
Walgreens FCF (2019) = 5,594 – 2,307 = 3,287 (in millions) = $3.3 billion
Walgreens FCF (2020) = 5,484 – 1,297 = 4,187 (in millions) = $4.2 billion
CVS FCF (2018) = 8,865 – 43,285 = -34,420 (in millions) = -$34.4 billion
CVS FCF (2019) = 12,848 – 3,339 = 12,506 (in millions) = $12.5 billion
What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two – why are they different (be as specific as possible).
FCF is available money that can be distributed to creditors and stockholders because its not needed for working capital or fixed asset investments. Across a two-year period, Walgreens has a higher FCF than CVS primarily due to CVS’s large acquisition in 2018. The vast majority of their investing activities in that year stemmed from that. Whereas Walgreens’s acquisitions and additions to PPE remained low, which means they aren’t expanding as much.
Ratios:
| Walgreens 8/31/20 | CVS 12/31/19 | EXPLAIN | ||
| A | Net Working Capital | -$9 billion | -$3 billion | Walgreens’s NWC decreased approximately 27% from 2019 to 2020, mainly due to its overall drop in revenue and new operating lease obligation. CVS’s NWC drastically decreased by approximately 350% from 2018 to 2019, mainly due to increased accrued expenses and all A/P costs. Walgreen’s reason for its decrease in NWC differs from CVS’s reason since Walgreen’s biggest liability increase is in its loan, while CVS has many liability increases stemming from its A/P and accrued expenses. Even though Walgreens’s -$9 billion NWC is lower than CVS’s -$3 billion NWC, I think CVS is worse because they have more areas to address for its drastic increase in current liabilities. Walgreens increased current liabilities simply stem from investing/growing. |
| B | Current ratio | 66.76% | 94.37% | CVS’s higher current ratio means they have a greater ability to pay its short-term debts with its short-term assets. However, even though CVS’s ratio/percentage is closer to 100% than Walgreens, it does not necessarily mean that CVS is a “healthier” company. In the previous problem, Walgreens’s decrease in NWC was resulted from a loan. Walgreens is taking measures to grow its company. CVS’s decrease in NWC was resulted from many A/P factors, which is more complex than taking out a loan. |
| C | Quick ratio | 31.85% | 61.51% | CVS’s higher Quick Ratio means they have a greater ability to meet its short-term financial obligations without relying on the sale of inventory. Instead of focusing on inventory, quick ratio focuses on assets that can be easily converted into cash, which is a more conservative measure of liquidity. CVS is less reliant on its inventories than Walgreens, as CVS’s inventories make up a little over 1/3 (17,516/50,302 = .35 = 35%) of its assets while Walgreens inventories make up approximately 1/2 (9,451/18,073 = .52 = 52%) of its assets. Similar to Current Ratio, 100% or greater is ideal. |
| D | Gross Profit ($ and %) | $28 billion And 25.12% | $98.1 billion And 38.19% | Gross profit solely focuses on the profitability of its core operating activities relating to its products or services sold. In other words, this metric only accounts for the revenue and costs associated with CVS and Walgreens products and services. Over a three-year period, CVS recorded a bigger total Gross Profit while Walgreens recorded a higher percentage of Gross Profit. CVS’s wider reach of selling its products and services is the result of having a bigger total Gross Profit, while Walgreens was able to manage its COGS more effectively, which resulted in a better percentage of Gross Profit. |
| E | Debt ratio | 75.76% | 71.15% | Debt ratio is a metric to measure how much of the company’s assets are financed by debt. The higher the ratio, the more debt is used. Both CVS and Walgreens have a debt ratio hovering around 70%; however, CVS has a much higher percentage of long-term debt (64,699/158,279 = .4088 = 40.88%) compared to Walgreens (12203/66039 = .1847 = 18.47%). This statistic means that CVS is investing more in its future than Walgreens, whether it loans or lease obligations. |
| F | Accounts Receivable Turnover | 19.56 | 13.09 | Walgreens has a higher A/R Turnover Ratio than CVS. A/R Turnover Ratio is a metric to determine how efficient a company is at collecting customer payments. The higher the number, the better, since it means the company is collecting payments quickly. However, if the ratio is too high, that may mean the company is too strict on collecting payment, which may upset customers. |
| G | Inventory Turnover | 11.8 | 9.06 | The Inventory Turnover Ratio determines how well a company sells its inventory. The higher the ratio, the more likely a company’s sales are healthy. However, if inventory is being sold too quickly, that may mean they’re underpricing their item, which leaves money on the table. Walgreens has a slightly higher ratio than CVS. It may be the result of offering a better selection of products and services that consumers like more or it could also be that Walgreen’s supply chain is more efficient than CVS. |
| H | EPS | .52 | 3.1 | Earnings per share is a metric that measures how much of the company’s profit is attributed to each outstanding share. Investors and analysts closely examine this metric because it’s an effective stat when comparing companies over a period of time. While CVS reported a higher EPS than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, people that are potentially seeking to receive a share of a company’s profits are better suited to investing in Walgreens. |
| I | ROE | 2% | 10.3% | Return on Equity is a metric that measures how well a company generates its profits from its shareholders’ money invested in the business. The higher the number, the better a company creates value from its shareholders’ investment. While CVS reported a higher ROE than Walgreens in the most recent year of its 10k, Walgreens has a better average over a two-year period. As a result, Walgreens manages its equity capital better than CVS. |
| J | Market cap | $34.45 billion | $96.72 billion | Market Cap is a metric that measures the total value of a company’s share at a given time multiplied by the total shares outstanding. Market Cap helps investors and analysts determine how big a company is. So, the larger the market cap, the more established the company is. If people want to put their money towards a “blue chip stock,” or a well-established company, this is usually a good indicator. Whether it is the customer experience, products and services offered, or the number of locations, CVS has a much greater Market Cap, which symbolizes that its overall presence is bigger than Walgreens. |
| K | Free Cash Flow | $4.2 billion | $12.5 billion | FCF is available money that can be distributed to creditors and stockholders because its not needed for working capital or fixed asset investments. Across a two-year period, Walgreens has a higher FCF than CVS primarily due to CVS’s large acquisition in 2018. The vast majority of their investing activities in that year stemmed from that. Whereas Walgreens’s acquisitions and additions to PPE remained low, which means they aren’t expanding as much. |
3. Which company would you invest, Walgreens or CVS, based on the financial statement analysis? Give me at least two sentences on how much and why.
I’d personally invest in CVS over Walgreens because CVS has a better EPS, Gross Profit %, and Return on Equity. These three metrics are all related because the more profit a company generates, the more earnings the company can distribute to its shareholders. In addition, a high ROE indicates that my investment is being managed efficiently. As a result, I’ll make more money with a company that performs well in these metrics.
Completed by Mikael Laferla
Mikael La Ferla 