Financial Performance - Research Paper Example

here A strategic analysis of Walgreens Company Financial ment is a very important piece of document that says a lot of things about the company. Stakeholders of the company are always interested in the financial health of the company wherein they have invested their money or plan to invest. Banks and financial institutions are eager to know status of the company in deciding whether or not to give loan to the company; stockbrokers are concerned if the stock is going to be profitable or will it be a good buy.

In the same way, manufacturers are making decisions on whether to extend credit to the company. In this concern, the most common source of information comes from the Financial Statements of the company. Reviewing financial information helps an investor and creditor to recognize company’s strengths and weaknesses that leads to good investment strategies and financial planning. The information found on the financial statements is important to company’s managers, stock and bonds analysts, bank loan officers and to competitors.

This study will use ratio analysis as a means to gain insight into the strengths and weakness of Walgreens Company. Three types of ratios will be used by this study to get into the desired information. Data will come from the published financial report of Walgreens and its competitors. First is the trend or time series analysis ratio to evaluate Walgreens performance over time. A cross-section analysis ratios will be done to establish comparison with different companies at same point in time.

Last is the industry comparative analysis ratio to confirm the company’s ratio against the industry where Walgreens is competing in. 1. Fig. 1. Trend series analysis – Comparative performance of Walgreen Company 2010 2009 2008 2007 2006 Net sales/revenue 67.42B 63.34B 59.03B 53.76B 47.41B Gross income 19.02B 17.71B 16.64B 15.24B 13.17B EBIT 3.46B 3.25B 3.44B 3.19B 2.75B Operating income 3.58B 3.51B 3.45B 3.16B 2.70B Net income 2.09B 2.01B 2.16B 2.04B 1.75B Net margin 3.09% 3.17% 3.65% 3.79% 3.

69 Source: Daily Finance 2010. Walgreen Income Statement From Fig. 1, we see a sustained long term revenue growth of Walgreen Company shown from 2006 to 2010. Trend analysis is a comparison of the past and present sales performance over the last couple of years. Any changes in the operations can be sensed thru the past performances and any activity whether it is growth of sales, and expenses can be monitored. For instance, management can readily explain the strategies that led to growth of company from 2006 to 2010. 2. The cross section analysis ratios with competitors in the industry.

Competitors are CVS Caremark Corporation, Rite Aid Corporation and Walmart Stores. Discussions below will show the interpretations and meaning of the ratios. Table 2. Cross section analysis ratios with competitors in the industry Market value ratio WAG CVS RAD WMT Price/earning 17.24 13.96 -1.38 12.06 Price/cash flow 11.53 10.44 3.82 7.60 Price/sales 0.57 0.50 0.03 0.47 PROFITABILITY EBITDA 4.48b 7.63B 507.54M 33.38Bb Operating margin 5.13% 6.39% 0.93% 5.41% GROWTH Net income 2.09B 3.42B -555.42 16.38B EPS (TTM) 2.39% 2.48% -0.64% 4.30% Revenue 67.42B 96.41B 25.41B 418.95B PEG 1.12% 1.23% - -- 1.

14% FINANCIAL STRENGTH Quick ratio 3.10 3.25 -23.20 3.91 Current ratio 1.66 1.20 1.82 0.90 LT debt to equity ratio 16.15 22.86 -259.45 74.91 Total debt to capital 15.85 21.04 155.17 40.90 ROE 14.82 9.07 -- 23.43 ROA 8.66 6.05 -2.56 9.97 Return on invested capital 12.46 7.97 -4.58 12.15 ASSETS Asset turnover 2.56 1.55 3.34 2.32 Asset per employee 108,040.98361 222,032.14286 82,307.734 85,874.2857 Inventory turn over 6.69 7.24 5.63 8.91 SOURCE: Daily Finance (2011) SOURCE: http://www.zacks.com/stock/quote/WAG Market value ratios is an observable market value such as stock price and book values obtained from the firm’s financial statements.

Commonly used variable in measuring market value ratios is the price/earning ratios which is an indication of how much an investor is willing to pay for each dollar of each firm’s earning per share. Comparing this P/E to its competitors will give an analyst a perception of the true value of the company. In Table 2, we see that WAG has the highest P/E among the group evaluated. Although it appears to be high, it could not be considered overvalued since its past performances could support its earning.

According to the Investopedia, a stock is fairly valued if the PEG (price-to-earnings-to growth) has a ratio of 1, and overvalued if PEG is more than 1. From Table 2, PEG of WAG is the lowest compared with competitors in the industry. Profitability ratios are indications of the firm’s ability to generate returns on its sales, assets and equity and two important ratios in this analysis are the operating profit margin and the net profit margin. Operating margin ratio is calculated on firm’s earning before payment of interests and taxes divided by net sales.

This is an indication of the ability of the company to control operating expenses in relation to sales. The results indicate that Walgreen was able to improve its profitability in succeeding years. Operating profit margin for 2010 is 5.132% which is slightly higher than 2009 of 5.131% Net profit margin is the ability of the company to earn a return after paying tax obligations and interests. It will be observed that the net income margin has gone lower in 2010 than in 2011 by 2%. The reason for lowered net income should be fixed by Walgreen.

As compared to its competitors and Walmart benchmark, Walgreen has the lowest derived net income that indicates weakness. Financial strength ratios are those that measure Walgreen’s ability to turn its assets into cash and the ability to pay its short term obligations as they fall due. The measure used by the study to look into the liquidity of Walgreen is the current ratio and the quick ratio. The current ratio obtained in Walgreens is 1.66 which means its current assets are adequate to cover the company obligations.

As a general rule, a ratio of 1 indicates a liquid position for a company. In relation to this, the financial capability of Walgreens will not be a matter of concern as it has a quick ratio of 3.10 meaning it has cash and securities readily available. Quick ratio does not include inventories in its calculations because it will take time to convert this into cash. 3. Industry analysis Top Peers Ticker Zach’s rank Walgreen Company WAG 4 Herbalife Ltd HLF 2 McKesson Corp MCK 2 Bioscrip Inc. BIOS 3 SOURCE: http://www.zacks.com/stock/quote/WAG In the industry analysis, peer review of top analysts in the stock performance of Walgreen Company showed a top ranking.

This is interpreted to mean that Walgreen Company outperforms competitors in the industry and has a high rating for a buy stock proposition. Conclusion. Analysis showed the strength of Walgreen is in its continued growth in sales and profit. It showed efficiency in performance in various ratio comparisons with its competitors in the industry. It has a weakness in the control of expenses in operation that affects its net profit as its operating margin is lower than competitors in the industry.

It is a best buy for investors as per industry analysis, and a recommended company for investors. References: Investopedia. Overvalued definition. Viewed 05 June 2011 http://www.investopedia.com/terms/o/overvalued.asp Daily Finance. 2011. WAG Walgreen Company Income Statement. Viewed 05 June 2011 http://www.dailyfinance.com/financials/walgreen-co/wag/nys/income-statement Zachs Investment Research. 2011. WALGREEN Co. Viewed 05 June 2011 http://www.zacks.com/stock/quote/WAG