Is This Healthcare Company an Outperform?
The debt to equity ratio is a measure of a company’s financial leverage. A high ratio generally represents that a company has been aggressive in financing its growth and operations with debt. While this may improve some metrics such as earnings in the short-term, too much debt can have disastrous effects in the longer-term.
Looking at CVS’s financials for its quarter ended September 30, 2012, it has a very strong debt to equity ratio of 0.76. However, adjusting for the company’s stock repurchase program, as seen in Treasury Stock, the debt to equity ratio improves to 0.53. In comparison, Express Scripts and Walgreen have ratios of 1.75 and 0.72, respectively.
In short, debt does not appear to be a concern with CVS. The company’s interest coverage ratio, which details how easily a company can cover its interest obligations, shows that it is only spending about 7.4 percent of its operating profit on net interest expenses. CVS is also able to return value to shareholders through strong revenue and cash flow results. Revenue increased 13.3 percent in the third quarter to a record $30.2 billion, while free cash flow year-to-date totals $4.1 billion.