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Running head: COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK1

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

COMPREHENSIVE FINANCIAL ANALYSIS OF CVS CAREMARK2

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.


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.


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.


Financial Statements for CVS Caremark

Table 1

CVS Balance Sheets

All numbers in millions (except per share items and employee)

Dec 2012 Dec 2011

Assets

Cash and Equivalents 1,375.00 1,413.00

Receivables 6,473.00 6,047.00

Inventories 10,759.00 10,046.00

Other Current Assets 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

Liabilities &Shareholders’ Equity

Accounts Payable 9,044.00 7,857.00

Short Term Debt 695.00 806.00

Other Current Liabilities 0.00 0.00


Total Current Liabilities 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

Minority Interest (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

Common Par 17.00 16.00

Additional Paid In Capital 29,120.00 28,126.00

Cumulative Translation Adjustment 0.00 0.00

Retained Earnings 25,049.00 22,090.00

Treasury Stock (16,270.00) (11,953.00)

Other Equity Adjustments (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

Total Common Shares Outstanding 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


Number of Employees 203000 124000

Number of Part-Time Employees 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

Sales 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

Research & Development 0.00 0.00

Operating Income before D & A (EBITDA) 8,981.00 7,898.00

Depreciation & Amortization 1,753.00 1,568.00

Interest Income 0.00 4.00

Other Income - Net (348.00) 0.00

Special Income / Charges 0.00 0.00

Total Income Before Interest Expenses (EBIT)

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

Minority Interest (2.00) (4.00)


Net Income From Continuing Operations 3,882.00 3,488.00

Net Income From Discontinued Operations (7.00) (31.00)

Net Income From Total Operations 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

Preferred Dividends

Net Income Available To Common 3,882.00 3,488.00

Basic EPS from Continuing Ops. 3.06 2.61

Basic EPS from Discontinued Ops. (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


EPS fr Discontinued Ops (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

Cash Flow from Operating Activities

Net Income (Loss) 3,875.00 3,457.00

Operating Gains/Losses 348.00 (53.00)

Extraordinary Gains / Losses 0.00 0.00

(Increase) Decrease In Receivables (387.00) (748.00)

(Increase) Decrease in Inventories (858.00) 607.00

(Increase) Decrease In Other Current Assets 3.00 (420.00)


(Decrease) Increase In Payables 1,147.00 1,128.00

(Decrease) Increase In Other Current Liabilities 753.00 85.00

(Increase) Decrease In Other Working Capital 11.00 (47.00)

Other Non-Cash Items 132.00 135.00

Net Cash From Continuing Operations 6,671.00 5,856.00

Net Cash From Discontinued Operations 0.00 0.00

Cash Provided By Investing Activities

Net Cash From Total Operating Activities 6,671.00 5,856.00

Sale of Property, Plant & Equipment 23.00 4.00

Sale of Short-Term Investments 0.00 0.00

Purchases of Property, Plant & Equipment (2,030.00) (1,872.00)

Acquisitions (371.00) (1,191.00)

Purchases of Short-Term Investments 0.00 (3.00)

Other Cash from Investing Activities 529.00 592.00

Cash Provided by Financing Activities

Net Cash From Investing Activities (1,849.00) (2,410.00)

Issuance of Debt 1,239.00 1,463.00

Cash Used for Financing Activities

Issuance of Capital Stock 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)


Payment of Cash Dividends (829.00) (674.00)

Other Financing Charges, Net (58.00) 443.00

Net Cash From Financing Activities (4,860.00) (3,460.00)

Effect of Exchange Rate Changes 0.00 0.00

Net Change in Cash & Cash Equivalents (38.00) (14.00)

* 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. Figures in millions

Ratios Calculations CVS 2012

Current Ratiocurrent assetscurrent liabilities 19852/13790 = 1.44

Quick Ratiocurrent assets - inventorycurrent liabilities (1357+6473)/13790 = 0.57

Debt Ratiototal liabilitiestotal assets 23208/65912 = 0.43

Debt-to-Equity Ratiototal debtshareholder equity 5828/37704 = 0.26

Times-Interest-Earned Ratio (TIE Ratio)

EBITinterest expense 6880/557 = 12.4

Inventory Turnover Rationet revenueinventory 123133/10759 = 11.44

Total Assets Turnovertotal revenuetotal assets 123133/65912 = 1.87

Return on Sales (ROS) (operating profittotal sales )*100 (7228/123133)*100 = 5.87%

Return on Total Assets (ROA)

annual net incomeaverage total sales 3877/65912 = 5.88%


Return on Total Equity (ROE) (net income

total shareholder equity )x 100 (3877/37704)*100 = 10.82%

Earnings Per Share(EPS)net earningsoutstanding shares 3882/1271 = 3.05

Price/Earnings Ratio (P/E Ratio)

market value per shareearnings per share 51.12/3.05 = 16.76

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.


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.


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


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


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 Ratiocurrent assetscurrent liabilities 1.60 1.56 1.44

Quick Ratiocurrent assets - inventorycurrent liabilities 0.57 1.56 0.64

Debt Ratiototal liabilitiestotal assets 0.39 0.62 0.43

Debt-to-Equity Ratio

total debtshareholder equity 0.27 0.41 0.26


EBITinterest expense 11.4 0.26 12.4

Inventory Turnover Ratio

net revenueinventory 9.00 10.7 11.44

Total Assets Turnover

total revenuetotal assets 1.55 1.66 1.87%

Return on Sales (ROS) (operating profit

total sales )*100 6.39 5.91 5.87


annual net incomeaverage total sales 5.51 5.36 5.88%



total shareholder equity )x 100 9.09 9.1 10.82%

Earnings Per Share(EPS)

net earningsoutstanding shares 2.51 2.6 3.05

Price/Earnings Ratio (P/E

Ratio)

market value per shareearnings per share 13.17 17.03 16.76

Figure 1. CVS Caremark’s financial ratios trend for the years 2010, 2011 and 2102.

Current Ratio Quick Ratio Debt Ratio Debt/Equity Ratio

TIE Ratio Inventory Turnover

Ratio

0

2

4

6

8

10

12

14

201020112012

3-Year CVS Caremark Financial Ratios (1-6)


Figure 2. CVS Caremark’s financial ratio trend for years 2010, 2011, 2012


ROS ROA ROE EPS P/E Ratio0

2

4

6

8

10

12

14

16

18

201020112012

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).


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)


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

2010 2011 20129700

9750

9800

9850

9900

9950

10000

10050

10100

Amount of Debt

Amount of Debt

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.


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

2010

2011

2012

0 2 4 6 8 10 12 14

Inventory Turnover RatioDays in Warehouse

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.


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.


Figure 5. CVS Return on Equity 3-Year Comparison

2010

2011

2012

8 8.5 9 9.5 10 10.5 11

ROE

ROE

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).


Figure 6. CVS Price Earnings Ratio 3-Year Comparison

2010

2011

2012

0 2 4 6 8 10 12 14 16 18

P/E RatioEarnings/Share

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.


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 Ratiocurrent assetscurrent liabilities 1.44 1.23 1.75

Quick Ratiocurrent assets - inventorycurrent liabilities 0.64 0.43 0.46

Debt Ratiototal liabilitiestotal assets 0.43 0.46 1.35

Debt-to-Equity Ratio

total debtshareholder equity 0.26 0.30 -2.26


EBITinterest expense 12.4 39.4 0.26

Inventory Turnover Ratio

net revenueinventory 11.44 10.18 8.32


total revenuetotal assets 1.87% 2.14% 3.55

Return on Sales (ROS) (operating profit

total sales )*100 5.87 % 28.4% 0.62%


annual net incomeaverage total sales 5.88% 6.36% -0.05


total shareholder equity )x 100 10.82% 11.66% -13.3%

Earnings Per Share(EPS)

net earningsoutstanding shares 3.05 2.25 -0.43

Price/Earnings Ratio (P/E

Ratio)

market value per shareearnings per share 16.76 15.9 -7.1


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


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


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


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.


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/liquidity-measurement/

ratio1.asp

Ycharts website. (2013). http://ycharts.com/companies/CVS/return_on_equity

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