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).
Ratio (TIE Ratio) 11.4 0.26 12.4 Inventory Turnover Ratio 9.00 10.7 11.44 Total Assets Turnover 1.55 1.66 1.87% Return on Sales (ROS) 6.39 5.91 5.87 Return on Total Assets (ROA) 5.51 5.36 5.88% Return on Equity (ROE) 9.09 9.1 10.82% Earnings Per Share(EPS) 2.51 2.6 3.05 Price/Earnings Ratio (P/E Ratio) 13.17 17.03 16.76 Figure 1. CVS Caremark’s financial ratios trend for the years 2010, 2011 and 2102. 3-Year CVS Caremark Financial Ratios (1-6) Figure 2. CVS Caremark’s financial ratio trend for years 2010, 2011, 2012 Earned
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 Ratio 1.44 1.23 1.75 Quick Ratio 0.64 0.43 0.46 Debt Ratio 0.43 0.46 1.35 Debt-to-Equity Ratio 0.26 0.30 -2.26 Ratio (TIE Ratio) 12.4 39.4 0.26 Inventory Turnover Ratio 11.44 10.18 8.32 Total Assets Turnover 1.87% 2.14% 3.55 Return on Sales (ROS) % 0.62% Return on Total Assets (ROA) 5.88% 6.36% -0.05 Return on Total Equity (ROE) 10.82% 11.66% -13.3% Earnings Per Share(EPS) 3.05 2.25 -0.43 Earned