Running Head: FINANCIAL ANALYSIS OF THE WALGREEN CO.
Learning Team Project: Financial Analysis of the Walgreen Company
Siena Heights University
LDR 640 Financial Systems Management
Team A
George Bartus
Sarah Farner
Gina Gudowski
Thomas Keith
1
FINANCIAL ANALYSIS OF THE WALGREEN CO.
Abstract
(to be completed at the end of the compilation, based on other added sections)
2
FINANCIAL ANALYSIS OF THE WALGREEN CO.
Table of Contents
Abstract
Introduction
Balance Sheets
Income Statement
Statement Cash Flows
Financial Ratio Analysis
Trend Analysis
Peer Group Analysis
Analytical Report
Assessment and Recommendations
Conclusion
References
3
FINANCIAL ANALYSIS OF THE WALGREEN CO.
4
Introduction
The Walgreen Co. was founded in 1901 by Charles R. Walgreen in Chicago, Illinois
(Walgreens). Charles Walgreen built the Walgreen Co. from its initial 50 feet by 20 feet store to
the 8,688 Walgreens stores in operation today (Walgreens: our past). The massive growth of
Walgreens drug stores over the past century speaks to the overall financial strength of the
company; however, through a comprehensive financial analysis utilizing the five basic groups of
financial ratios this paper will take a detailed look at the financial strength of the Walgreen Co.
Regardless of the size, a corporation’s financial viability can be determined through
financial statement analysis. The income statement, balance sheet and statement of cash flows
are basic indicators of financial condition and are the end products of the financial accounting
process (Hawawini & Viallet, 2011). The balance sheet shows what a company owns and what
they owe at a given period of time (Hawawini & Viallet, 2011). The income statement is often
referred to as the “profit-and-loss” statement and determines the difference between a firm’s
revenues and expenses over a given period of time (Hawawini & Viallet, 2011). The statement
of cash flows report a company’s cash transactions over a given period of time (Hawawini &
Viallet, 2011).
The three basic financial statements are utilized to determine financial ratios, which are
tools used to compare the financial statements of various companies regardless of industry and
firm size.
Liquidity refers to a firm’s ability to turn assets into cash (Hawawini & Viallet,
2011). Liquidity ratios measure the capacity of the business to meet short term financial
commitments as they become due (Small Business Development Corporation).
Essentially, the
higher the value of the ratio, the better the firm can cover its short term debts (Investopedia).
FINANCIAL ANALYSIS OF THE WALGREEN CO.
5
There are two main types of liquidity ratios, the current ratio and the quick ratio. The
current ratio is obtained by dividing a firm’s current assets by its current liabilities. (Hawawini
& Viallet, 2011). The ratio determines whether a firm has enough current assets to meet its
short term obligations. The larger the current ratio, the more liquid the firm; however, the
current ratio should be at least greater than or equal to one (Hawawini & Viallet, 2011). The
quick ratio also determines whether or not a firm has enough current assets to meet its short term
obligations, however, this ratio excludes inventory (Hawawini & Viallet, 2011). As a result, the
quick ratio is a more conservative measure of liquidity.
Solvency is a firm’s ability to meet its long term cash obligations (Hawawini & Viallet,
2011). The solvency ratio quantifies the size of a company’s after tax income, excluding noncash depreciation expenses, and compares it to the total debt obligations of the firm (Hawawini
& Viallet, 2011). Also, it provides an assessment of the likelihood of a company to continue
congregating its debt obligations (Ready Ratios). The solvency ratio is calculated through
adding the after tax net profit and depreciation and dividing by total liabilities (Ready Ratios).
A firm with a solvency ratio of at least 20% is considered to be financially sound (Ready
Ratios). Firms with lower solvency a ratios are more likely to default on their debt.
Asset management ratios compare how well a firm uses its assets such as inventory,
accounts receivable, and fixed assets to generate sales and revenue (Ready Ratios).
There are
multiple types of asset management ratios, including total asset turnover which determines how
well a firm is managing all of their available assets in the form of sales generation. Accounts
payable turnover ratios help to determine how fast a company pays off its creditors (Ready
Ratios). The inventory turnover ratio is another asset management ratio that determines the
number of times inventory is sold or used in a given time period (Ready Ratios).
FINANCIAL ANALYSIS OF THE WALGREEN CO.
6
Profitability ratios refer to how successful a company is at running their business. They
determine if a company is making money, whether or not their profitability is in line with the
competition, and if their profit is going up or down (Morning Star, 2010). There are a few types
of profitability ratios, one of the most basic being return on equity. Return on equity measures a
firm’s return on investments by shareholders (Morning Star, 2010).
It is calculated by dividing
earnings after tax by owners’ equity (Hawawini & Viallet, 2011). Another basic profitability
ratio is gross margin, which is the amount of each dollar of sales that a company keeps in the
form of profit (Morning Star, 2010). Gross margin is obtained by dividing gross profit by sales
(Morning Star, 2010).
The final basic group of financial ratios is market value ratios. Market value ratios
determine the economic status of your company in the marketplace and are comprised of a few
ratios including earnings per share, price to earnings ratio, and market to book ratio. The
earnings per share ratio is a measure of a firms normalized earnings after tax (Hawawini &
Viallet, 2011). This ratio is calculated by dividing earnings after tax by the number of shares
outstanding (Hawawini & Viallet, 2011). The price to earnings ratio is the ratio of a firms
current share price compared to its current share earnings and is obtained by dividing the share
price by the earnings per share (Hawawini & Viallet, 2011). Finally, the market to book ratio
allows investors to see how much a firm is actually valued relative to the market value and is
obtained by dividing the share price by the book value per share (Hawawini & Viallet, 2011).
FINANCIAL ANALYSIS OF THE WALGREEN CO.
Walgreens- Balance Sheet
Cash and Equivalents
Receivables
Inventories
Other Current Assets
Total Current Assets
Property, Plant & Equipment, Gross
Accumulated Depreciation &
Depletion
Property, Plant & Equipment, Net
Intangibles
Other Non-Current Assets
Total Non-Current Assets
Total Assets
Liabilities & Shareholder Equity
Accounts Payable
Short Term Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Deferred Income Taxes
Other Non-Current Liabilities
Minority Interest
Total Non-Current Liabilities
Total Liabilities
Preferred Stock Equity
Common Stock Equity
Common Par
Additional Paid In Capital
Cumulative Translation Adjustment
Retained Earnings
Treasury Stock
Other Equity Adjustments
Total Capitalization
Total Equity
Total Liabilities & Stock Equity
Total Common Shares Outstanding
Preferred Shares
Treasury Shares
Basic Weighted Shares Outstanding
Diluted Weighted Shares Outstanding
7
Aug-13
2,106.00
2,632.00
6,852.00
284
11,874.00
18,181.00
Aug-12
1,297.00
2,167.00
7,036.00
260
10,760.00
17,160.00
Aug-11
1,556.00
2,497.00
8,044.00
225
12,322.00
15,834.00
Aug-10
1,880.00
2,450.00
7,378.00
214
11,922.00
15,019.00
6,043.00
5,122.00
4,308.00
3,835.00
12,138.00
1,307.00
7,752.00
23,607.00
35,481.00
12,038.00
1,286.00
7,217.00
22,702.00
33,462.00
11,526.00
1,212.00
377
15,132.00
27,454.00
11,184.00
1,114.00
168
14,353.00
26,275.00
4,635.00
570
2,750.00
8,883.00
4,477.00
600
2,067.00
0
7,144.00
16,027.00
0
19,454.00
80
1,074.00
0
21,523.00
-3,114.00
-109
23,931.00
19,454.00
35,481.00
946.6
0
81.58
946
955.2
4,384.00
1,319.00
0
8,722.00
4,073.00
545
1,886.00
0
6,504.00
15,226.00
0
18,236.00
80
936
0
20,156.00
-2,985.00
49
22,309.00
18,236.00
33,462.00
944.06
0
84.12
874.7
880.1
4,810.00
13
674
8,083.00
2,396.00
343
1,785.00
0
4,524.00
12,607.00
0
14,847.00
80
834
0
18,877.00
-4,926.00
-18
17,243.00
14,847.00
27,454.00
889.29
0
136.11
915.1
924.5
4,585.00
12
73
7,433.00
2,389.00
318
1,735.00
0
4,442.00
11,875.00
0
14,400.00
80
684
0
16,848.00
-3,101.00
-111
16,789.00
14,400.00
26,275.00
938.61
0
86.79
981.7
987.9
FINANCIAL ANALYSIS OF THE WALGREEN CO.
Walgreens-Income Statement
Sales
Cost of Sales
Gross Operating Profit
Selling, General, and Administrative Expenses
Research & Development
Operating Income before D & A (EBITDA)
Depreciation & Amortization
Interest Income
Other Income - Net
Special Income / Charges
Total Income Before Interest Expenses (EBIT)
Interest Expense
Pre-Tax Income
Income Taxes
Minority Interest
Net Income From Continuing Operations
Net Income From Discontinued Operations
Net Income From Total Operations
Extraordinary Income/Losses
Income From Cum. Effect of Acct. Change
Income From Tax Loss Carryforward
Other Gains / Losses
Total Net Income
Normalized Income
(Net Income From Continuing Operations,
Ex. Special Income / Charge)
Preferred Dividends
Net Income Available To Common
Basic EPS from Continuing Ops.
Basic EPS from Discontinued Ops.
Basic EPS from Total Operations
Basic EPS from Extraordinary Inc.
Basic EPS from Cum Effect of Accounting
Change
Basic EPS from Tax Loss Carryf'd.
Basic EPS from Other Gains (Losses)
Basic EPS, Total
Basic Normalized Net Income/Share
EPS fr Continuing Ops.
EPS fr Discontinued Ops
8
Aug-13
72,217.00
49,815.00
22,402.00
17,543.00
0
4,859.00
1,283.00
0
484
0
4,060.00
165
3,895.00
1,445.00
0
2,450.00
0
2,450.00
0
0
0
0
2,450.00
Aug-12
71,633.00
50,125.00
21,508.00
16,878.00
0
4,630.00
1,166.00
0
0
0
3,464.00
88
3,376.00
1,249.00
0
2,127.00
0
2,127.00
0
0
0
0
2,127.00
Aug-11
72,184.00
50,606.00
21,578.00
16,561.00
0
5,017.00
1,086.00
0
434
0
4,365.00
71
4,294.00
1,580.00
0
2,714.00
0
2,714.00
0
0
0
0
2,714.00
Aug-10
67,420.00
47,414.00
20,006.00
15,518.00
0
4,488.00
1,030.00
0
0
0
3,458.00
85
3,373.00
1,282.00
0
2,091.00
0
2,091.00
0
0
0
0
2,091.00
2,450.00
2,127.00
2,714.00
2,091.00
2,450.00
2.59
0
2.59
0
2,127.00
2.43
0
2.43
0
2,714.00
2.97
0
2.97
0
2,091.00
2.13
0
2.13
0
0
0
0
0
0
0
2.59
2.59
2.56
0
0
0
2.43
2.43
2.42
0
0
0
2.97
2.97
2.94
0
0
0
2.13
2.13
2.12
0
FINANCIAL ANALYSIS OF THE WALGREEN CO.
Walgreens – Income Statement Cont’d
EPS fr Total Ops.
EPS fr Extraord. Inc.
EPS fr Cum Effect of Accounting Change
EPS fr Tax Loss Carfd.
EPS fr Other Gains (L)
EPS, Total
Diluted Normalized Net Inc/Shr
(Net Income From Continuing Operations,
Ex. Special Income / Charge)
Dividends Paid per Share
9
Aug-13
2.56
0
0
0
0
2.56
Aug-12
2.42
0
0
0
0
2.42
Aug-11
2.94
0
0
0
0
2.94
Aug-10
2.12
0
0
0
0
2.12
2.56
1.14
2.42
0.95
2.94
0.75
2.12
0.59
FINANCIAL ANALYSIS OF THE WALGREEN CO.
Walgreens – Statement of Cash Flows
Cash Flow From Operating Activities
Net Income (Loss)
Operating Gains/Losses
Extraordinary Gains / Losses
(Increase) Decrease In Receivables
(Increase) Decrease in Inventories
(Increase) Decrease In Other Current Assets
(Decrease) Increase In Payables
(Decrease) Increase In Other Current
Liabilities
(Increase) Decrease In Other Working Capital
Other Non-Cash Items
Net Cash From Continuing Operations
Net Cash From Discontinued Operations
Cash Provided By Investing Activities
Net Cash From Total Operating Activities
Sale of Property, Plant & Equipment
Cash Used for Investing Activities
Sale of Short-Term Investments
Purchases of Property, Plant & Equipment
Acquisitions
Purchases of Short-Term Investments
Other Cash from Investing Activities
Cash Provided by Financing Activities
Net Cash From Investing Activities
Issuance of Debt
Cash Used for Financing Activities
Issuance of Capital Stock
Repayment of Long-Term Debt
Repurchase of Capital Stock
Payment of Cash Dividends
Other Financing Charges, Net
Net Cash From Financing Activities
Effect of Exchange Rate Changes
Net Change in Cash & Cash Equivalents
10
Aug-13
Aug-12
Aug-11
Aug-10
2,450.00 2,127.00 2,714.00 2,091.00
-344
0
-434
0
0
0
0
0
-449
394
-243
124
321 1,083.00
-592
-307
18
-4
0
0
182
-439
384
167
527
-412
320
272
68
109
88
160
97
142
188
144
4,301.00 4,431.00 3,643.00 3,744.00
0
0
0
0
4,301.00 4,431.00 3,643.00 3,744.00
0
123
79
0
16
0
0 3,500.00
-1,212.00 1,550.00 1,213.00 1,014.00
-610
-536
-188
-779
-66
0
0
3,000.00
100
128
-203
19
-1,996.00 5,860.00 1,525.00 1,274.00
4,000.00 3,000.00
0
0
486
0
0
0
-4,300.00
0
-17
-576
-615 1,191.00 2,028.00 1,756.00
-1,040.00
-787
-647
-541
-27
148
250
196
-1,496.00 1,170.00 2,442.00 2,677.00
0
0
0
0
809
-259
-324
-207
FINANCIAL ANALYSIS OF THE WALGREEN CO.
11
Financial Ratio Analysis
We calculated twelve financial ratios for Walgreens during the 2013 fiscal year. The
ratios have been divided into five categories; liquidity, solvency, asset management, profitability,
and market value ratios. We independently calculated the ratios and will analyze the ratios
below.
Financial Ratios Walgreens
Current Ratio
Current assets/current liabilities
Quick Ratio
Cash+Accounts Receivable
Current Liabilities
Debt to Equity Ratio
Total Debt/Total Equity
Times Interest Earned Ratio
EBIT/Interest Expenses
Inventory Turnover
COGS/Ending Inventories
Total Assets Turnover Ratio
Sales/Total Assets
Earnings Per Share
EAT/# of shares of common stock
outstanding
Debt to Asset Ratio
Total Debt/Total Assets
Return on Sales
EAT/Sales
Return on Assets
EAT/Total Assets
Return on Equity
EAT/Total equity
Price to Earnings Ratio
Price per share/Earnings per share
2013
2012
2011
1.336711 1.23366 1.52443
0.533378363 0.40862 0.50142
0.259432507 0.29568 0.16226
24.60606061 39.3636 61.4789
7.270140105 7.12408 6.29115
2.035371 2.14073 2.62927
2.588210437 2.25303 3.05187
0.377042277 0.50112
0.1955
0.03392553 0.02969
0.0376
0.069051041 0.06356 0.09886
0.12593811 0.11664
0.1828
22.4375 15.2934 11.2449
Liquidity ratios reflect an organizations ability to pay its debt. The current ratio divides
the current assets by the liabilities. Walgreens has $1.33 of assets to every dollar of liability
FINANCIAL ANALYSIS OF THE WALGREEN CO.
which is the current ratio. The quick ratio reflects an organizations ability to pay its current debt
as it due. The quick ratio excludes inventories and prepaid assets with Walgreens having a .53 to
1 quick ratio. Usually an organization can improve their quick ratio through better management
of their product cycle. A quick ratio below zero is less than desirable (Porter, 2011).
The debt to equity and times interested earned ratio were the solvency ratios used to
describe an organizations long term financial stability beyond paying their short term debt. The
debt to equity ratio was calculated by dividing the total debt by total equity which was .25 for
2013. For every dollar of capital the stock holders provided 25 cents was provided by creditors.
Walgreens may be placing a special emphasis to keep their debt significantly lower than the past.
The times earned interest ratio places an emphasis on payment owed on interest, specifically we
mentioned the organizations ability to meet the interest on current year payments out of current
year earning (Porter, 2011). The times interest earned ratio was 24.6 to 1. This means that for
every dollar Walgreens pays in interest they earn 21 more dollars. This is more than enough to
pay the interest for this current year.
In the asset management category we calculated the inventory turnover, and total asset
turnover ratios. The inventory turnover ratio represents how many times inventory is sold in a
period. Walgreens on average sells their inventory seven times a period. The total asset turnover
ratio for Walgreens was .2 and represents the relationship between net sales and total assets.
Walgreens has two times the sales than their average assets.
Profitability ratios calculated were return on sales, equity, and asset ratios. The return on
sales was 3 percent. Walgreens is earning 3 cents on each dollar of sales. Return on equity
expresses the amount earned on income from investments. The return on equity was 12 percent
which explains profitability from the owner’s perspective.
12
FINANCIAL ANALYSIS OF THE WALGREEN CO.
The market value ratios are expressed through the price per earnings and earnings per
share ratios. Earnings per share was $2.58 which means that each investors earned 2.58 per share
of stock that he or she purchased. The price to earnings ratio was calculated at 22.4 which means
that Walgreens is trading at 22 times its current earnings (Hawawini, 2011. p. 159).
Trend Analysis
The financial ratios for Walgreens were calculated using data from the income statement,
balance sheet and cash flow statement for the years 2011, 2012 and 2013. The current ratio
dipped from a high of 1.52 in 2011 to 1.34 in 2012 with a recovery of sorts in the third year
2013. The quick ratio exhibited a similar dip in 2012 but was close to .5 in all three years. The
current ratio should be above 1 and close to 2 to show profitability. The quick ratio is desired to
be as close to 1 as possible.
Walgreens debt to equity ratio averaged 24% for the fore mentioned three years with a
low of 16% and a high of 30%. This could be due to a move to leverage debt for tax purposes.
The Times Interest Earned ratio moved from a high of 66% in 2011 to a low of 25% in 2013
another trend based on borrowing. Inventory Turnover held steady at an average of 7.1 times per
year which is indicative of steady sales. The Total Asset Turnover ratio did move from a high of
2.7 in 2011 to a low of 2.03 in 2013 showing a downward reduction.
The recorded three years had a dipping trend for the Earning per Share with a high in
2011 dipping in 2012 and recovering in 2013. The Debt to Asset ratio showed an increase from
the base year to the middle year from 20% to 50% indicating borrowing in 2012. The Return on
sales held relatively steady at an average of 3.4% for the reported years. The Return on Assets
and Return on Equity dipped in 2012 but recovered nicely in 2013. The P/E ratio increased
nicely doubling from 2011 to 2013 to 22.4.
13
FINANCIAL ANALYSIS OF THE WALGREEN CO.
In conclusion, the indicators shown by the ratios discussed above describe a company
with competent management, a well thought-out capital structure achieving a large sales volume
with reasonable risk. The balance sheet shows steady earnings for the investors and an
increasing stock price.
Peer Group Analysis
Analytical Report
Assessment and Recommendations
Conclusion
14
FINANCIAL ANALYSIS OF THE WALGREEN CO.
15
FINANCIAL ANALYSIS OF THE WALGREEN CO.
References
Hawawini, G. & Viallet, C. (2011). Finance for Executives. Managing for value creation.
Mason: South-Western Cengage Learning
Investopedia (n.d.). Liquity ratios. Retrieved from http://www.investopedia.com/terms/l/
liquidityratios.asp
Morning Star (2010) Profitability Ratios. Retrieved from
http://news.morningstar.com/classroom2/course.asp?docId=145093&page=6
Porter, G. A., & Norton, C. L. (2011). Using financial accounting information: the alternative to
debits and credits (7th ed.). Mason, OH: South-Western/Cengage Learning.
Small Business Development Corporation (n.d.) Liquidity Ratios. Retrieved from
https://www.smallbusiness.wa.gov.au/liquidity-ratios
Ready Ratios (n.d) Asset management. Retrieved from
http://www.readyratios.com/reference/asset/
Ready Ratios (n.d). Solvency ratios. Retrieved from http://www.readyratios.com/reference
/analysis/solvency.html
Walgreens. (2010 to 2013). Retrieved from NASDAQ: http://www.nasdaq.com/symbol/
wag/financials
Walgreens (n.d.) Walgreens: our past. Retrieved from http://www.walgreens.com/topic/about
/history/hist5.jsp
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