As an investor, discuss which company you would choose to invest in and provide a rationale for your decision|Course hero helper

Posted: February 24th, 2023

Group Project: CVS and Walgreens

FINC 331 6380 Finance for the Nonfinancial Manager

Group Term Paper

 

 

 

 

 

 

 

 

 

 

1. Provide a short background on each company, the industry and the market (growing, declining, etc?) in which they operate.

 

CVS and Walgreens are two of the largest and most well-established players in the retail, pharmaceutical industry in the United States. With a strong focus on customer service, convenience, and innovation, both companies are well-positioned to succeed in an increasingly competitive market.

CVS Health Corporation was founded in 1963 as a Consumer Value store and is headquartered in Woonsocket, Rhode Island. It operates over 9,000 retail locations across the United States, including its flagship CVS Pharmacy stores. In addition to traditional pharmacy services, CVS also offers a range of health-related products and services, including health clinics, diabetes management, and home health-care services (CVS Health History). The company also operates a large pharmacy benefits management (PBM) business, which manages prescription drug plans for employers and government health plans. On the other hand, Walgreens Boots Alliance was designed in 2014 through the merger of Walgreens and Alliance Boots, a European pharmacy chain (Walgreens Boots Alliance). The company is headquartered in Deerfield, Illinois, and operates over 9,000 retail locations in the United States, including its flagship Walgreens stores. In addition to traditional pharmacy services, Walgreens also offers a range of health and wellness products, including vitamins, supplements, and personal care products (Walgreens Boots Alliance History). The company also operates a large wholesale business, supplying drugs and other health-related products to other retailers and health-care providers.

The retail, pharmaceutical industry is highly regulated, with strict laws and regulations governing the distribution of prescription drugs. As a result, the industry is dominated by a small number of large players, including CVS and Walgreens. Competition in the industry is intense, with companies competing on factors such as price, convenience, and customer service. The usage of generic medications, which are frequently less expensive than brand-name medications, as well as the rising popularity of mail-order and online pharmacies have both had an influence on the industry in recent years (CVS Health Pharmacy and Health Services). The market for retail pharmaceutical services in the United States is large and growing, with spending on prescription drugs reaching over $450 billion in 2020. Despite this growth, the industry remains highly competitive, with companies such as CVS and Walgreens facing increasing pressure from online and mail-order pharmacies, as well as from new entrants, such as grocery store chains, which are entering the market with their own in-store pharmacies. In order to remain competitive, companies in the retail and pharmaceutical industry must continue to innovate and offer new and improved products and services while also controlling costs and maximizing profits.

2. Using the current ratio and debt ratios, discuss what conclusions you can make about each company’s ability to pay current liabilities (debt). Support your conclusions. Which company is doing better, why or why not?

Walgreens’ current ratio as of November 30, 2022: 0.70 (Macrotrends, 2022).

CVS’ current ratio as of September 30, 2022: 0.94 (Macrotrends, 2022)

Debt Ratio = Total Debt/Total Assets

Walgreens debt ratio: $10,615,000,000/$90,124,000,000 = 12%

CVS debt ratio: $63,800,000,000/$231,212,000,000 = 27.5%

Both companies are at risk of not being able to pay off their current short-term financial obligations, though CVS is more financially stable than Walgreens. One major difference between the two companies is that CVS owns a Pharmacy Benefits Manager, or PBM, whereas Walgreens must pay a PBM. Owning a PBM essentially cuts out middleman costs that other pharmacies must pay to negotiate patient-drug benefits (Hanzard, S. 2022).

Both companies also have a high debt ratio, though Walgreens’ debt ratio is more favorable that CVS’.

3. Using the profitability and operating performance ratios, discuss what conclusions you can make about each company’s profits over the past three years. Support your conclusions. Which company is doing better, why or why not?

CVS Company

Profitability indicator ratios: ·

Return on Equity

Net Income/Average Shareholders

Average Shareholders= (Opening Shareholder equity/ Closing Shareholder equity)/2

2022

(71011 + 75381)/2= 73196

17350/73196

0.24

2021

(75381+ 69701)/2 = 72541

7910/72541 =

0.11

2020

(69701 + 64170)/2 = 66936

7170/74761

0.11

Return on Assets

Net Income/ Total Assets

2022

17350/231212

0.08

2021

7910/232999

0.03

2020

7170/230715

0.03

Operating performance ratio: ·

Fixed asset turnover ratio

Net sales/ Average Fixed Ratio

Average Fixed Ratio = (Opening balance + Closing Balance)/2

2022

(162871+172991)/2 = 167931

315225/167931

1.90

2021

(172991+ 174436)/2 = 173669

292111/173669

1.7

2020

(174436 + 172147)/2 = 173292

268706/173292

1.6

 

Walgreens Company

Profitability indicator ratios: ·

Return on Equity

Net Income/Average Shareholders

Average Shareholders= (Opening Shareholder equity/ Closing Shareholder equity)/2

2022

(29366 + 23822)/2 = 26594

4337/26594

0.20

2021

(23822+ 21136)/2 = 22479

2542/ 22479

0.11

2020

(21136 + 23776)/2 = 22456

456/22456

0.02

Return on Assets

Net Income/ Total Assets

2022

4337/90124

0.05

2021

2542/ 81285

0.03

2020

456/87174

0.01

Operating performance ratio:

Fixed asset turnover ratio

Net sales/ Average Fixed Ratio

Average Fixed Ratio = (Opening balance + Closing Balance)/2

2022

(90124 + 81285)/2 = 85705

132703/85705

1.55

2021

(81285 + 87174)/ 2 =84230

132509/84230

1.60

2020

(87174 + 112420)/2 = 99797

121982/ 99797

1.22

 

Conclusion

CVS Company

The computations above show the financial statement analysis of the two companies, CVS and Walgreen, respectively, based on profitability indicators and operating performance ratios. To begin with CVS profitability indicators, the return on equity has improved over the three years from 0.11 in 2020 to 0.24 in 2022. According to the documentation (Fernando, 2022, p. 2), the higher the increase in the return on equity, the higher the capacity of the Company to convert equity into profits. The computations, therefore, indicate that the capacity of the Company to convert equity into

QUESTIONS 1.5 pages

 

5. As an investor, discuss which company you would choose to invest in and provide a rationale for your decision. Support your conclusions, why or why not?

 

6. After concluding your research about each company and reviewing their annual report, Discuss what non-financial criteria you would consider when choosing between these two investment options? Support your conclusions, why or why not?

SOLUTION

The retail pharmacy industry in the United States is a highly competitive and growing market. According to a report by Grand View Research, the global pharmacy retail market is expected to reach $1.7 trillion by 2028, driven by factors such as the rising prevalence of chronic diseases, increasing geriatric population, and growing demand for over-the-counter medications (Grand View Research). However, the industry is also facing challenges, including rising drug prices, increased competition from online retailers, and changes in healthcare policies and regulations.