CVS is one of the most prominent players in the pharmaceutical market, second only to Walgreens. The capital structure, as determined by the debt-to-equity ratio, is 1.223 for CVS, compared to 1.3 for Walgreens. This indicates that CVS is slightly less leveraged than its competitors (Macrotrends, 2023a; Macrotrends, 2023b). Comparing this value over several years, it becomes noticeable that the ROI of CVS is less volatile, but also does not reach the limits set by Walgreens (Macrotrends, 2023a; Macrotrends, 2023b). Consequently, CVS is taking a more careful approach than its competitor, warning itself and its shareholders against the significant volatility caused, for example, by the COVID-19 pandemic.
The current situation with the Fed funds rate in the US aims to combat high inflation rates. Accordingly, the rate has been growing significantly in recent years, complicating the lending process and putting companies heavily dependent on borrowed capital at risk (TradingEconomics, 2023). The risk-free rate rises in tandem with the interest rate as the Central Bank attempts to stabilize the currency and increase the percentage of its savings on deposits, which could help bring down inflation. In this case, CVS may seize local development opportunities to gain market share, but risks like reduced net profit and financial leverage must be weighed against it.
In the future, the price of debt will rise if the growth dynamics of the interest rate continue. The WACC of the company in question may decrease when implementing an expansion, but this move may offset the expensive lending costs in the short term, as inflation rises. Therefore, CVS should opt for a growth strategy through local expansion rather than international expansion, given the high lending costs and associated risks.
Future projected market conditions become the basis of the strategy chosen now: the financial approach to implementing local strategic development will determine future outcomes. If CVS can sacrifice free cash flow and maintain a growth rate above inflation, its competitiveness will only increase. Otherwise, there is a risk of losses or excessive lending, which will negatively impact the liquidity of CVS and the attractiveness of its investments to shareholders.
References
Macrotrends. (2023a). CVS Health Balance Sheet 2009-2023 | CVS.
Macrotrends. (2023b). Walgreens Balance Sheet 2009-2023 | WBA.
TradingEconomics. (2023). United States Fed Funds Rate.