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CVS Health Corporation (NYSE:CVS) Delivered A Better ROE Than The Industry, Here’s Why

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on CVS Health Corporation (NYSE:CVS) stock.

CVS Health Corporation (NYSE:CVS) delivered an ROE of 17.24% over the past 12 months, which is an impressive feat relative to its industry average of 13.80% during the same period. Superficially, this looks great since we know that CVS has generated big profits with little equity capital; however, ROE doesn’t tell us how much CVS has borrowed in debt. We’ll take a closer look today at factors like financial leverage to determine whether CVS’s ROE is actually sustainable. View out our latest analysis for CVS Health

Peeling the layers of ROE – trisecting a company’s profitability

Return on Equity (ROE) weighs CVS Health’s profit against the level of its shareholders’ equity. An ROE of 17.24% implies $0.17 returned on every $1 invested. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is measured against cost of equity in order to determine the efficiency of CVS Health’s equity capital deployed. Its cost of equity is 10.02%. Given a positive discrepancy of 7.22% between return and cost, this indicates that CVS Health pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NYSE:CVS Last Perf June 21st 18
NYSE:CVS Last Perf June 21st 18

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue CVS Health can make from its asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be inflated by excessive debt, we need to examine CVS Health’s debt-to-equity level. Currently the debt-to-equity ratio stands at a high 168.30%, which means its above-average ROE is driven by significant debt levels.

NYSE:CVS Historical Debt June 21st 18
NYSE:CVS Historical Debt June 21st 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. CVS Health’s above-industry ROE is encouraging, and is also in excess of its cost of equity. With debt capital in excess of equity, ROE may be inflated by the use of debt funding, raising questions over the sustainability of the company’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For CVS Health, I’ve compiled three fundamental factors you should look at:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is CVS Health worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CVS Health is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of CVS Health? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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