Walgreens vs Cvs Accounting

Summary:CVS Caremark and Walgreens Co. are both free-standing pharmacies and stores (drug-retail). Both CVS Caremark Corporation and Walgreen Co. provide prescriptions and healthcare services (including nonprescription and OTC drugs), and general merchandise in the United States. Both offer walk-in clinic services, photo development, as well as basic grocery options.

CVS has approximately 7,001 stores across 45 states and Puerto Rico (the second largest to Walgreen Co. in the US), and was founded in Massachusetts in 1963. Walgreens operates in all 50 states with about 7,034 stores in the US, the District of Columbia and Puerto Rico. Walgreens was founded in Chicago, IL in 1901 and has since expanded.

Ratios + Comments:

| | |CVS | |Walgreen | |Industry | | | |Caremark | |Co. | |Average | |Ratio |Year | | | | | | |ROA |2008 |5.46% | |9.63% | |0.2 | | |2007 |4.79% | |10.57% | | | | |2006 |6.59% | |10.22% | | | | |2005 |7.92% | |10.68% | | | | |2004 |6.22% | |10.12% | | |

The return on assets (ROA) percentage shows how profitable a company’s assets are in generating revenue. Compared to the industry average, CVS and Walgreen’s ROA are much higher. However, Walgreen’s ROA is higher than CVS’s; which means that the latter is not benefiting as much from its assets as Walgreens does.

In 2008, Both Companies have less ROA than 2004. In 2008, Walgreen’s has the least ROA during the five years of Data as it has struggled to maintain its level.

Walgreen’s ROA hovers around 10%, where CVS’s ratio has a downward trend. It is important to note that the ratio Return on Assets is derived by multiplying Profit Margin by Total Asset Turnover. This means that from 2004 to 2008 either CVS Caremark’s profit margin decreased while the Total Asset T/O remained constant or vice versa, or both decreased in the 5 year time period. What actually happened in regards to CVS’s ROA’s downward trend is the profit margin increased from 3% to 3.82%, while the Total Asset T/O decreased from 2.4 to 1.5 approximately. (see final page for ratio tables)

| | |CVS | |Walgreen | |Industry | |Ratio |Year |Caremark | |Co. | |Average | |ROE |2008 |9.69% | |16.76% | |1 | | |2007 |8.42% | |18.38% | | | | |2006 |13.85% | |17.31% | | | | |2005 |14.72% | |17.54% | | | | |2004 |13.11% | |16.58% | | |

Return on Equity measures a firm’s efficiency at generating profits from every unit of shareholders’ equity (also known as net assets or assets minus liabilities).

ROE shows how well a company uses investment funds to generate earnings growth. Both companies have extremely higher ROE compared to the industry average. Once again, Walgreen is taking more advantage of its shareholders’ equity than CVS. From 2004 to 2008, Walgreen had a stable ROE that reached its highest in 2007 ( 18.38%). On the other hand, CVS’ ROE went down significantly in 2007 from around 13% to about 8.%.

Keep in mind ROE equals ROA multiplied by Leverage (Assets/Equity). This being said CVS’s drastic downward jump can be explained not by its ROA (it stays fairly constant as we saw previously) but instead by it’s leverage. CVS greatly increased the amount of debt used to finance business operations between the years 2006 and 2007 jumping from around $9,900 to $31,000. Why CVS made this decision exactly is unknown.

Walgreen’s total equity climbed at a constant rate by about a $1000 per year starting at about $9,000 in 2005 to $12,000 in 2008.

| | |CVS | |Walgreen |Industry | |Ratio |Year |Caremark | |Co. |Average | |Debt |2008 |19.28% | |6.52% |1.5 | | |2007 |19.16% | |6.32% | | | |2006 |24.59% | |3.59% | | | |2005 |14.32% | |2.60% | | | |2004 |19.54% | |2.08% |

The debt ratio explains the amount of debt maintained by both respective companies, and represents the amount of debt used by the company to finance business operations and is calculated by Total Debt divided by Total Assets.

Looking at the long term Debt Data and Debt ratio Data, there is a huge difference between in the numbers between CVS and Walgreens. CVS seems to have the majority of its assets financed through debt. They both have Debt ratio much higher than the industry average.

Discussing other relevant ratios:|Profit Margin |CVS | |Walgreens |Industry Avg | | |2008 |3.82% | |3.65% |1 | | |2007 |3.46% | |3.80%| | | |2006 |3.12% | |3.69% | | | |2005 |3.31% | |3.70% | | | |2004 |3.00% | |3.60% | |

The Profit Margin is calculated by finding the net profit as a percentage of the revenue. Profit margin is an indicator of a company’s pricing policies and its ability to control costs. This is the % of final profit generated from sales and would be derived from the Income Statement. Both companies are achieving much higher Profit margin than the industry average. Their Profit margin is pretty close to each others. From 2004 to 2007, Walgreen had more profit Margin than CVS. However, in 2008, CVS had more Profit Margins and achieved its highest since 2004.

|Interest Coverage |CVS | |Walgreens |Industry average | | |2008 |10.93 | |115.33 |3.5 | | |2007 |9.859 | |@CF | | | |2006 |9.819 | |@CF | | | |2005 |15.719 | |@CF | | | |2004 |19.769 | |@CF | |

The interest coverage ratio shows how easily a company can pay interest on outstanding debt. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. Obviously, they both have enough revenues to cover their interest expenses as CVS’s lowest recorded value was 9.8, and the only available record of Walgreen’s is 115.

Conclusion:Regarding the main ratios covered in this study, it seems that Walgreens is has an edge over CVS, not taking into account that Walgreens is larger than CVS. Walgreens has greater Returns on Assets, Return on Equity, as well as Profit margin.

In other words, Walgreens is efficiently generating more profits from every unit of shareholders’ equity and debt and is benefiting more from the investment funds to generate earnings growth, and maintained a sufficiently higher amount of solvency.

Also, Walgreens is generating more profits from its assets than CVS does. Although both companies’ profit margin is somewhat close, Walgreens has a greater profit margin than CVS. From 2004 to 2007, Walgreens had a greater profit margin than CVS. However, in 2008, CVS had the larger profit margin and achieved its highest since 2004 at 3.82%. It will be interesting to see how the down turning economy affects the growth of CVS and Walgreens’ ability to be the ‘big dog’ on the street in terms of retail pharmacies.

|Profit Margin |CVS |Walgreens | | |2008 |3.82% |3.65% | | |2007 |3.46% |3.80% | | |2006 |3.12% |3.69% | | |2005 |3.31% |3.70% | | |2004 |3.00% |3.60% |

|Total Asset T/O |CVS |Walgreens | | |2008 |1.512 |2.83 | | |2007 |2.028 |2.95 | | |2006 |2.444 |2.987 | | |2005 |2.481 |3.02 | | |2004 |2.439 |3.031 |

|Fixed Asset T/O |CVS |Walgreens | | |2008 |10.765 |6.039 | | |2007 |13.041 |6.5564 | ||2006 |8.214 |6.8225 | | |2005 |9.362 |6.845 | | |2004 |- |- |

|Avg Coll Period |CVS |Walgreens | | |2008 |20.504 |14.524 | | |2007 |16.406 |14.394 | | |2006 |17.325 |13.133 | | |2005 |17.529 |10.942 | | |2004 |18.32 |10.495 |

|Inventory T/O |CVS |Walgreens | | |2008 |7.91 |5.92 | | |2007 |7.82 |5.89 | | |2006 |4.97 |5.78 | | |2005 |4.85 |5.79 | | |2004 |4.77 |6.02 |

|Long Term Debt |CVS |Walgreens | | |2008 |8057.2 |1377 | | |2007 |8349.7 |38.5 | | |2006 |2879.4 |38.7 | | |2005 |1594.1 |38.6 | | |2004 |- |- |

|Debt Ratio (debt/assts) |CVS |Walgreens | | |2008 |19.283 |6.524 | | |2007 |19.155 |6.321 | | |2006 |24.587 |3.589 | | |2005 |14.323 |2.595 | | |2004 |19.769 |2.079 |

|Total Assets |CVS |Walgreens | | |2008 |60960 |22410 | | |2007 |54722 |19314 | ||2006 |20570 |17131 | | |2005 |15283 |14608 | | |2004 |- |- |

|Int. Coverage |CVS |Walgreens | | | 2008 |10.93 |115.33 | | |2007 |9.859 |@CF | | |2006 |9.819 |@CF | | |2005 |15.719 |@CF | | |2004 |19.769 |@CF |

|Total Equity |CVS |Walgreens | |2008 |34574.4 |12869.0 | |2007 |31321.9 |11104.3 | |2006 |9917.6 |10115.8 | |2005 |8331.2 |8889.7 | |2004 |- |- |