INvesting Analysis of Walgreen's and CVS (for Accounting)

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Investing Activities

The investing activities of these two companies (Walgreen’s and CVS) can best be described and analyzed by looking at eight different numbers, many of which are inter-related. Because Walgreen’s is a much larger company than CVS these numbers will be helpful in bringing them both on the same playing field. By viewing these numbers one will be able to determine the effectiveness, efficiency, and rate of growth of each company.

Using the figures found in the financial statements of these two companies, from the years 000 to 00, one can make the calculations to find total assets increased (from year to year), property and equipment growth, increase in revenues, and increase in net income. Total assets increased for CVS from 000 to 001 was 10.48%, compared to .77% for Walgreen’s during that same time period. This same trend continues in the following year (001 to 00) showing a decrease for CVS at .68% and, also a decrease for Walgreen’s, but still significantly higher at 17.58%. Both companies are accumulating assets, meaning that their companies are growing, but the rate at which they are growing seems to be slowing down.

One can further examine these two companies by looking at the property and equipment growth for these same two fiscal periods. From 000 to 001 property and equipment growth for CVS was 6.04% and 6.75% for Walgreen’s. The next year there is a huge difference. For CVS it was 1.5% and only 5.66% for Walgreen’s. This is directly related to the amount of capital expenditures spent in the in the investing activities section of the statement of cash flows for these companies. Once again both companies are still growing in this aspect of their business.

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The third number to look at is increase in revenues. CVS had an increase of 10.7% and Walgreen’s an increase of 16.11% from 000 to 001. The following year not much changed for either company with CVS dropping slightly to 8.7% and Walgreen’s remaining pretty constant at 16.48%.

The last aspect to look at in this area before moving on is increase in net income. Walgreen’s, once again, was fairly steady from year to year going from 1.% to 15.0%. However CVS had a negative increase in net income from 000 to 001 of -45.5%. This was a result of several factors, but the main three appear to be a high selling, general , and administrative expense, a higher than normal depreciation expense, as well as a big hit in special items during 001. This is not uncommon for CVS because it does most of its growth by acquiring other companies. The following year they made a huge recovery and had an increase in net income of 76.11%.

The preceding numbers helped to identify certain aspects of investing activities. The following numbers will assist in analyzing how assets are used in measuring the effects of growth and how well these companies are investing their assets. A common measure of the outcome of a company’s investment decisions is return on assets (ROA). Looking at the ROA for the years 000 to 00 one can notice several trends as well as come to conclusions about these company’s investment decisions. In 000 Walgreen’s had an ROA of 1.88% and CVS 15%. This means that for every dollar invested in assets by Walgreen’s the company earned 1.88 cents. For every dollar invested in assets by CVS the company earned 15 cents. Over the next two years this stayed pretty much the same for Walgreen’s with an ROA of 0.1% in 001 and 1.7% in 00. For CVS we see a drop in 001 with an ROA of 7% and it goes back up in 00 with an ROA of 1%.

One way to examine events that affect a company’s return on assets is to separate ROA into components. Two primary components of ROA are asset turnover and profit margin. Return on assets is the product of asset turnover and profit margin. A company with a high asset turnover is more effective in using its assets to sell its products than one with a low asset turnover. In 000, 001 and 00 Walgreen’s had an asset turnover of 5.7; 5.60; and 5.55 respectively, while CVS had an asset turnover of 4.07; 4.08; and 4.04 respectively. Both companies were stable in this area, however Walgreen’s was slightly more effective in using its assets to sell its products.

The other component is profit margin. A company with a high profit margin is more efficient in controlling costs to produce profits from its sales than one with a low profit margin. In 000, 001 and 00 Walgreen’s had a profit margin of .66%; .6%; and .55% respectively. CVS had a profit margin of .64%; 1.7%; and .%. The reason for the drop in 001 for CVS is due to the drop in net income (since profit margin is net income/revenues). Again, Walgreen’s comes out ahead, being more efficient in controlling costs to produce profits from its sales than CVS. From these three numbers we can see that Walgreen’s has been doing a better job of investing its assets to turn a profit.

The last number that will be looked at under the investing section of these two companies is the net cash flow of investing activities in the statement of cash flows 000, 001, and 00. Starting with CVS, they show (in thousands) -$640.5; -$56.8; and -$75.8 respectively. Two notes should be made here. One, again it should be mentioned that while sales were up for CVS in 001 net income was down due to factors previously mentioned, making the number for 001 seem a little out of the ordinary. And two, CVS is known for making investments by way of acquisitions, but in 00 they did not make any, however they did have a large amount of capital expenditures as well as sales of property etc. Walgreen’s had the numbers of -$1,07.4; -$1,14.5; and -$551.. Two notes should be made here as well. One, is that Walgreen’s had a lower that normal capital expenditures expense, and two they sold off quite a bit more property etc. than they had in the four previous years combined. The higher this number is in the negative (net cash flow of investing activities) the better it is for the company, because it shows that the company is taking an active role in expanding/growth by placing its assets in areas where it can produce a profit.



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