Financial Analysis Assignment Harvard Case Solution & Analysis

Part 1: Industry Section

            CVS Health Corporation is one of the providers of the pharmacy services in the health care industry of United States. The company has been creating value by controlling its costs and providing a wide range of the pharmacy services to its customers. If we talk about the recent outlook of the health care industry in US then it could be said that one of the main challenges which is being faced by the companies in the health care industry in US is of reducing their costs.

            The pressure on the providers would be high to manage their costs as a result of the expanding Medicaid rolls, increased patient volume and lowered reimbursement rates. Therefore, in order to create value the providers of health care have been engaging in hospital-hospital acquisitions through horizontal integration.Vertical integration has also been observed as the organizations prepare themselves for accountable care organizations.

            The current cost structure is also being analyzed by the providers.The outlook of the industry would be such that the number of the patients would increase significantly and the reimbursements would be lower. Lastly, most of the changes which are driven by government programs such as Obamacare and Medicare and also by insurers and employers are making the consumers more conscious about how and what they spend on health insurance and healthcare.

Part 2: FR & Comparisons

            The FR and Comparison section has been completed and all the data for the period of 2011 to 2014 has been extracted from the 10k reports of CVS Health Corporation. Based on this extracted data, all the required ratios have been calculated based on the formulas as provided in the formula sheet. Next the trend analysis has also been performed for all the highlighted ratios. Majority of the ratios show a fluctuating trend. The median comparable ratios for the industry have also been incorporated in the excel spreadsheet and based upon the comparison of the 2014 ratios for CVS and the industry ratios, each ratio has been identified as favorable or unfavorable for the company.

            Lastly, the ratios for CVS have been compared with the ratios of three group companies which are Express Scripts, Rite Aid and Walgreens. It could be seen that the performance of the company based upon the majority of the liquidity ratios, leverage ratios, performance ratios is much better as compared to the other three companies in the industry. The calculations of the ratios for each of the three companies could be also seen in the excel sheet with the name ‘Peer Comparisons.’

Part 3: Working Investment

            Based upon an anticipated 10% increase in the sales of CVS for the following year, an analysis has been performed for the incremental working investment needed. The working investment needed in the following year would be $ 925.4 million and the new net profit for the following year would be $ 5108.4. Therefore, it could be said that the company would be able to finance the additional working investment need internally as net profit is much higher.

Part 4: Debt Analysis

a). The financial leverage for the company has increased and has been consistently increasing from 2011 to 2014. One of the main reasons for this would be the increase in the fixed assets of the company over the same period. If we look at the fixed assets of the company, then it could be seen that the fixed assets have been increasing consistently and therefore, the company has been raising new borrowings to finance the new fixed assets.Financial Analysis Assignment Case Solution

b). The financial index leverage ratio has been calculated which is 1.81. Since, this ratio is higher than 1 therefore, it could be said the CVS is using debt efficiently.

c). In order to evaluate the company’s ability to pay all the fixed charges on time, first of all if we look at the interest coverage ratio of the company, then this ratio is quite high than the industry and also much higher than the peer companies. Similar is the case with the fixed charge ratio of CVS. However, the cash flow adequacy ratio has been following a fluctuating trend but it is significantly higher than all the three peer companies. Hence, it could be concluded that the company has a strong capability of paying fixed charges on time as they become due.........................

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