Balance Sheet (In Millions) 2014 2013
Assets
Current Assets
Cash and Cash Equivalents 2,646 2,106
Accounts Receivable, net 3,218 2,632
Inventories 6,076 6,852
Other Current Assets 302 284
Total Current Assets 12,242 11,874
Non-‐Current Assets
Alliance Boots 7,248 6,261
Alliance Boots Call Option 0 839
Goodwill 2,359 2,410
Other Non-‐Current Assets 3,076 1,959 Total Non-‐Current Assets 24,940 23,607
Total Assets 37,182 35,481
Liabilities and Stockholders’
Equity
Current Liabilities
Short-‐term Borrowings 774 570
Non-‐operating Operating
Trade Accounts Payable 4,315 4,635 Accrued Expenses and Other
Liabilities 3,701 3,577
Income Taxes 105 101
Total Current Liabilities 8,895 8,883
Non-‐Current Liabilities
Long-‐term Debt 3,736 4,477
Deferred Income Taxes 1,048 600
Other non-‐current
Liabilities 2,942 2,067
Total Non-‐Current Liabilities 7,726 7,144
Shareholder’s Equity
Preferred Stock 0 0
Common Stock 80 80
Paid-‐In Capital 1,172 1,074
Employee Stock Loan
Receivable (5) (11)
Retained Earnings 22,229 21,523
Accumulated Other Comprehensive (Loss)
Income
178 (98)
Treasury Stock (3,197) (3,114)
Non-‐controlling Interests 104 0
Total Shareholders’ Equity 20,561 19,454 Total Liabilities and
Shareholders’ Equity 37,182 35,481
Financial Analysis
Net Operating Profit After Tax
Net operating profit after tax or NOPAT is found by subtracting the operating revenue minus the operating expenses. Income attributed to a non-controlling interest normally would not be included in operating revenue. However, since in the fiscal year 2015 they acquired a controlling interest in Alliance Boots the earnings from that investment are still included.
2010 2011 2012 2013 2014 NOPAT $2,143.69 $2,758.88 $2,182.44 $2,433.79 $2,601.07
$2,000
$2,200
$2,400
$2,600
$2,800
$3,000
Net Operating Pro_it After Tax
Net Operating Assets
Net operating assets or NOA are calculated by taking the operating assets less operating liabilities.
Return on Net Operating Assets
2010 2011 2012 2013 2014 NOA $14,921 $15,700 $22,331 $22,395 $22,425
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
$22,000
$24,000
Net Operating Assets
2010 2011 2012 2013 2014 RNOA 14.77% 18.02% 11.48% 10.88% 11.61%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
Return on Net Operating Assets
Return on net operating assets or RNOA is calculated by dividing NOPAT over average NOA. Walgreens purchased a non-controlling interest of Alliance Boots in 2012, and did not report earnings until the following fiscal year. In the past few years they have also made numerous purchases of smaller drugstores chains. In 2013 they purchased USA Drug that included over one hundred stores, and in the following year they purchased some assets from Kerr Drug that included over seventy retail locations. These purchases were costly not only initially, but also because of the conversion of the standing stores into Walgreens brand locations. Returns on these operating assets are just now being realized.
Return on Equity
Return on equity or ROE is calculated by dividing net income over average stockholder’s equity. The majority of Walgreens’s ROE is from their operating assets.
Their ROE has fallen in recent years. This could mean that they are using more debt,
2010 2011 2012 2013 2014 ROE 14.53% 18.56% 12.86% 13.00% 10.15%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
Return on Equity
however it is important to note that the return on net operating assets has fallen in a similar manner. This suggest that they are simply earning less on their operating assets.
Net-Operating Return
The small non-operating return is a good sign for Walgreens. They are taking on less of a risk by not having as high of fixed debt repayments. They are able to finance most of their business through their operations. The small non-operating return also shows that while ROE and RNOA are falling, the return on non-operating assets has not increased enough to show a significant increase in the use of debt financing.
2010 2011 2012 2013 2014 Non-‐Ops Return -‐0.23% 0.54% 1.38% 2.12% -‐1.46%
-‐0.25%
0.25%
0.75%
1.25%
1.75%
2.25%
Non-‐Operating Return
Net Operating Asset Turnover
The net operating asset turnover (NOAT) is a measure of the how productive a company’s net operating assets are. A higher NOAT is preferred, thus it is a good sign that Walgreens’ is beginning to see an increase again after a two-year decrease. In the fiscal year 2014 Walgreens saw $3.41 in sales for each dollar of net operating assets.
Walgreens is just now beginning to realize a profit from their purchase of Alliance Boots.
This relationship is evident from the slump in the year of purchase, and the increase now that they have seen earnings.
2010 2011 2012 2013 2014
NOAT 4.64 4.71 3.77 3.23 3.41 3.00
3.50 4.00 4.50 5.00
Net Operating Asset Turnover
NOAT breaks down into five components:
2010 2011 2012 2013 2014
ART 27.26 29.18 30.72 30.10 26.12
INVT 4.50 4.41 4.64 4.93 5.77
LTOAT 4.91 4.90 3.79 3.12 3.16
APT 10.89 11.00 11.16 11.33 12.25
NOWCT 13.80 16.54 22.82 28.72 24.11
Net Operating Profit Margin
In the fiscal year 2014 Walgreens earned a little over three cents in operating profit for each dollar in sales. While profit margin has been holding steady, the net operating asset turnover had been falling steadily until 2014 when it saw a slight increase.
This suggests that they are operating as a product differentiator. In the past fiscal year, however, they both were increasing suggesting that Walgreen’s is somewhere in the middle of strategies. This makes sense in that they are in a time of change with the
2010 2011 2012 2013 2014
NOPM 3.18% 3.82% 3.05% 3.37% 3.40%
3.00%
3.20%
3.40%
3.60%
3.80%
4.00%
Net Operating Pro_it Margin
acquisition of Alliance Boots, but to further investigate it will take a few more years of data to see where their strategy is headed.
NOPM breaks down into two components:
2010 2011 2012 2013 2014
GPM 28.15% 28.39% 28.40% 29.24% 28.23%
OEM 96.77% 96.74% 96.91% 97.05% 97.32%
Non-operating Return
2010 2011 2012 2013 2014
-‐.23% .54% 1.38% 2.12% -‐1.46%
The non-operating return is composed of FLEV and spread. FLEV stands for financial leverage and is found by dividing the average net non-operating obligations by average equity. The spread is found by subtracting NNEP or the net non-operating expense percent from RNOA.
2010 2011 2012 2013 2014
FLEV .018 .05 .15 .19 .12
Spread -‐5.46% 11.49% 9.24% 11.34% -‐11.62%
Multiplying FLEV by the spread gives the return on non-operating assets. FLEV grew significantly from 2011 to 2012, but has fallen in the fiscal year 2014. This contributed the negative non-operating return in 2014 as well.
Limitations of Ratios
Measurability is an issue for Walgreens since they are such a well-known, visible company. They hold a significant amount of intangible value. As a trusted pharmacy, and store that has been around for over one hundred years their brand name has immense value. Walgreens also owns a considerable amount of real estate around the country, and any loss or gain on these properties may not have been reported yet.