Question

SOLVENCY RATIOS

Debt ratio for Walgreens = Total Liabilities / Total assets

Debt ratio for Walgreens 2018 = $68,124 / $68,124 = 1

Debt ratio for Walgreens 2017 = $66,009 / $66,009 = 1

Debt ratio for CVS

Debt ratio for CVS 2018 = $196,456 / $196,456 = 1

Debt ratio for CVS 2017 = $95,131 / $95,131 = 1

What do the results of this ratio mean in the context of Walgreens? How about CVS? Compare the two - why are they different (be as specific as possible).

Answer 1

Debt to equity ratio reflects the ability of shareholder's equity to cover all short term and long term debts that is all outstanding debts in the event of a business downturn .

In tough times , company having lower debt equity ratio will have better probabilty to survive as it's equity will be able to take care of it's debt and will be able to drive company through tougher times as it is mandatory for a company to pay it's debt including its interest. In other words , the ideal debt to equity ratio is less than 1 which indicates that companies financial strength is not the amount taken by debt but the shareholder's equity is enough to finction the finacial tasks in the company.

In the case of Walgreens , the debt to equity ratio is 1 for both the years which indicates that it is on the verge of getting out of the comfort zone and if company faces downturn then all the equity of the company will be used up in settling the debts of the company and it will be difficult for the copany to suvrvive . Moreover , in the last year ,the company's assets increased just because it took the debt of same amount which is clearly indicated by the total liabilities amount . This is not the positive sign for the company and questions the growth of the company .

In the case of CVS , the debt to equity ratio is 1 for both the years which indicates that it is on the verge of getting out of the comfort zone and if company faces downturn then all the equity of the company will be used up in settling the debts of the company and it will be difficult for the copany to suvrvive . Moreover , in the last year,  the company's assets increased just because it took the debt of same amount which is clearly indicated by the total liabilities amount . This is not the positive sign for the company and questions the growth of the company .

So , all in all the scenario of both the companies ; Walgreens and CVS is same and doesn't give a positive signs in their growths .

Now comparing between the Walgreens and CVS, both the companies has taken debts in prvious years which was the only reason for there increase in assts as their assets and liabilities both increased by the same amount in 2018, but Walgreens toook a debt of only around $2000 whereas CVS took a debt of more than $1,00,000 on which they will have to pay interest too . Walgreens will also have to pay interest but they will have to pay less interest as they took less debt , so the values of the debts of the CVS will increase more rapidly as compared to Walgreens which will inturn increase the debt equity ratio. So, comparing both the comapnies, Walgreen's position is somewhat better as compared to CVS's position because of the amount of debt they have taken in the last 2018.