Key Financial Indicators of Express Scripts, Inc

Introduction

This is a case analysis of Express Scripts, Inc. It focuses on the analysis of key financial ratios for the last five years, current accounting and finance concepts in financial decision-making, a financial problem and current reporting requirements, and the ethical as well as cross-cultural components of contemporary accounting and financial issues as required in the practice of financial economics. It finally presents recommendations to the board based on the outcomes of the analysis.

Analysis of financial ratios

Financial ratios analysis for Express Script, Inc. is based on annual statements from the year 2009 to 2013.

Profitability Ratios

Gross Profit Margin

= Gross Profit / Revenue (Net Sales) = ____

• 2009
  • 2,424.0 / 24,722.3= 0.098
• 2010
  • 2,958.2 /44,973.2= 0.0658
• 2011
  • 3,209.9 /46,128.3= 0.0696
• 2012
  • 7,311.9 /93,714.3 = 0.078
• 2013
  • 8,132.4 / 104,098.8 = 0.078

The gross profit margins for Express Scripts, Inc. show that the company has an effective way of managing its costs of inventory; it therefore can pass low costs on to customers.

Net Profit Margin

= Net Income/Net Sales = _____

• 2009
  • 826.6/ 24,722.3= 0.033
• 2010
  • 1,181.2 /44,973.2= 0.027
• 2011
  • 1,278.5 /46,128.3= 0.0277
• 2012
  • 1,330.1 / 93,714.3 = 0.0144
• 2013
  • 1,898.2 / 104,098.8 = 0.01823

The company makes profits from every dollar after paying all its expenses. The margin ranges from one percent to three percent. This represents profits that Express Scripts, Inc. makes from a dollar in terms of cents. However, the company’s profitability has started to decline.

The Cash Flow Margin ratio

= Cash flow from operating cash flows/Net sales = _____

• 2009
  • 1,752 / 24,722.3= 0.071
• 2010
  • 2,105 /44,973.2= 0.0468
• 2011
  • 2,192.0 /46,128.3= 0.0475
• 2012
  • 4,751.1 / 93,714.3 = 0.051
• 2013
  • 4,768.9 / 104,098.8 = 0.046

From the results, one can identify how Express Scripts, Inc. has managed to generate cash from its customers through sales and other services. These are significantly high ratios which prove that Express Scripts, Inc. has good cash flows. Therefore, the company does not face any risks from its suppliers and investors or any solvency problems.

The Return on Assets ratio

Net Income/Total Assets = _____

• 2009
  • 826.6/ 11,931.2 = 0.069
• 2010
  • 1,204.6 /10,557.8 = 0.1141
• 2011
  • 1,275.8 / 15,607.0 = 0.0817
• 2012
  • 1,345.2 / 58,111.2 = 0.0231
• 2013
  • 1,898.2 / 53,548.2 = 0.035

The ROA shows the profitability of Express Scripts, Inc. in comparison to its assets. From the ratios, one can conclude that the company can effectively use its assets to generate revenues and profits.

At the same time, Express Scripts, Inc. can leverage on its assets to control debts in order to maximize returns for its shareholders. In the last two years, the company has embarked on aggressive asset maximization.

The Return on Equity ratio

= Net Income/Stockholder’s Equity = _____

• 2009
  • 826.6 / 3,551.8 = 0.2327
• 2010
  • 1,204.6 /3,606.6 = 0.3339
• 2011
  • 1,275.8 / 2,473.7 = 0.516
• 2012
  • 1,345.2 / 23,395.7 = 0.057
• 2013
  • 1,898.2 / 21,844.8 = 0.087

Between the year 2009 and 2011, Express Scripts, Inc. had a good REO of up to 51%, hence good returns for shareholders, but this has changed. Between 2012 and 2013 financial periods, the company’s REO declined to below 10% because of the increase in equity. This situation has affected shareholders’ returns.

It is advisable to invest in companies with good REO over time, but the current state of Express Scripts, Inc. could be detrimental for potential investors. This indicates that the company has not managed to maintain its profitability. It shows that Express Scripts, Inc. relies on shareholders’ equity for its growth.

Cash Return on Assets

= Cash flow from operating activities/Total Assets = _____

• 2009
  • 1,752.0 / 11,931.2 = 0.147
• 2010
  • 2,105.1 /10,557.8 = 0.199
• 2011
  • 2,193.1 / 15,607.0 = 0.1405
• 2012
  • 4,751.1 / 58,111.2 = 0.0817
• 2013
  • 4,768.9 / 53,548.2 = 0.089

Cash Return on Assets Ratio is significant in evaluating how the company has maximized its investments to generate income from its assets (Kieso, Weygandt, & Warfield, 2013). From the recent figures of the last two years, one can conclude that the company’s performance has started to decline.

Shareholder Equity Ratio

= Total Shareholder Equity/Total Assets

• 2009
  • 3,551.8 / 11,931.2 = 0.297
• 2010
  • 3,606.6 /10,557.8 = 0.199
• 2011
  • 2,475.3 / 15,607.0 = 0.342
• 2012
  • 23,395.7 / 58,111.2 = 0.403
• 2013
  • 21,844.8 / 53,548.2 = 0.408

Over the years, shareholders’ equity has continued to rise steadily as the company borrows to fund its operations. Therefore, in case of a company-wide liquidation, investors would get good returns from their investments. These are high ratios, which suggest that the company operates with investments from shareholders.

Liquidity

= current assets/current liabilities

• 2009
  • 11,931.2 / 8,379.4 = 1.424
• 2010
  • 10,557.8 / 6,951.2 = 1.519
• 2011
  • 15,607.0 / 13,133.3 = 1.188
• 2012
  • 58,111.2 / 34,715.5 = 1.674
• 2013
  • 53,548.2 / 31,703.4 = 1.69

Low liquidity ratios (less than one) show that the company may not easily meet its short-term obligations. Express Scripts, Inc. has high liquidity ratios and thus, it can meet its near-term obligations. The company can meet its obligations through its current assets (current ratio). This is important, because Express Scripts, Inc. can change its short-term assets into cash in order to clear its debt easily. Hence, it may not face bankruptcy. The above ratios show that the company will be able to continue as a going concern.

Accounting and financial concepts in financial decision-making as required in the practice of financial economics

In management accounting, accounting and financial concepts are required to support financial decision-making. Decision-making allows managers to choose the best alternatives from the available options. In case there are no alternatives, then no decision is necessary, but this is not necessarily the case in a company.

The basic assumption is that the best decision should maximize revenues, shareholders’ returns at minimum costs to the company. Therefore, the management team must find the best alternatives to support financial decision-making. Although it is a complex process, financial decision-making remains the most critical aspect of management accounting.

The company should recognize that accounting and financial concepts in financial decision-making support management accounting with the aim of making not necessarily the best decision but rather a good one. The complexities of financial tools, which support decision-making, make it difficult to identify the best decision. As a result, financial decision-making is a highly complex, subjective process. The company will define its management objectives to determine the suitability of the chosen decision. Hence, the most important role for financial management decision-makers is to set the company’s goals and objectives.

For instance, Express Scripts, Inc. has both strategic objectives and tactical decisions. The company focuses on the quality of its services and risks in new projects and pricing among others as it sets goals and objectives. Strategic decisions are wide and they could reflect tactical decisions of the company. They tend to be subjective because the management team formulates such decisions to support their goals and objectives for the company.

Management accounting should provide a clear distinction between strategic objectives and tactical ones. Generally, financial decision-making from management accounting relies on tactical strategies. For example, financial decision-making should guide cash management. Express Scripts, Inc., for example, may manage a minimum cash level with low risks to investors based on strategic decisions from the management accounting. Tactical decisions provide specific terms for such decisions.

Accounting and financial concepts support decision-making by offering quantitative aspects of the company. There must be tangible data from financial records to support any decision that the management team makes. The decisions made in the company could be short-term or long-term. In this process, the choice between long-term and short-term decisions is critical for Express Scripts, Inc. Today, the company manages short-term decisions on quarterly basis. This is vital for profitability objectives of the company.

While not all businesses may focus on similar goals, a public company like Express Scripts, Inc. must pursue profits to meet expectations of investors and stakeholders. In this case, accounting and financial concepts must provide guidelines for achieving profitability objectives. For instance, Express Scripts, Inc. may focus on net income or profit, sales or cash flow, return on total assets, return on total equity and earnings per share to achieve its strategic goals. In this case, management accounting must consider profitability objectives during decision-making processes, as well as long-term and short-term goals. In this regard, the company must minimize expenses to protect profits.

It is difficult to make short-term decisions in an organization because of competing interests. Managers may focus on profitability maximization. Decision-makers require information from every financial tool available for decision-making. Therefore, management accountant should offer specific information to facilitate decision-making. This implies that the needed information must be obtained from various sources, particularly from the company’s financial records.

From accounting principles and concepts, the management account must provide information that facilitates decision-making. Information should reflect the company’s financial, service and market position. Accountant must obtain all related costs from various sources and report them appropriately. Such data would eventually aid in preparing financial statements. Financial statements should provide related company’s historical financial data alongside descriptive elements to support decision-making. All items listed in the financial statement should support specific financial decision. For every decision, there is accounting and financial concept to support the management team in financial decision-making processes.

A financial problem and current reporting requirements as required in the practice of financial economics

The statement of cash flows is a fundamental accounting and financial tool that offers the required financial information (U.S. Securities and Exchange Commission, 2005). Analysts and investors rely upon “the statement of cash flows to provide information about the net income of the company” (U.S. Securities and Exchange Commission, 2005, p. 1). In this regard, the essence of effective classification and presentation of the relevant information in the consolidated statement of cash flows may not be underestimated.

As such, management accountants or financial officers should pay critical attention to the preparation of their “consolidated statement of cash flows in order to ensure that it provides an accurate presentation of their actual cash receipts and cash payments based on various activities (operating, investing and financing)” (U.S. Securities and Exchange Commission, 2005, p. 1). This in turn helps analysts, investors and readers to understand and determine the ability of the business to meet its financial obligations, pay dividends and generate cash flows sufficient to grow its business (U.S. Securities and Exchange Commission, 2005; Whisenant & Fairfield, 2000).

According to Whisenant and Fairfield (2000), firms with poor financial records also show deteriorating financial performance in the subsequent years. Effective analysis of financial records can successfully help in uncovering operational challenges with accounting techniques (Whisenant & Fairfield, 2000). The statement of cash flows and other financial tools are used for fundamental analyses to assist auditors to detect challenges in the company.

While some believe that a statement of cash flows provides adequate financial information for decision-making through a direct method of reporting, the U.S. Securities and Exchange Commission (SEC) has noted that many firms continue to apply indirect method in reporting (U.S. Securities and Exchange Commission, 2005). On this note, it is imperative for the company to apply direct reporting methods in a statement of cash flows, provide supporting information as footnotes and ensure the accuracy of the report.

There are problems with the classification of cash receipts from inventory sales when reporting financial performance. The company can finance the sale of inventory through different means. The SEC requires cash receipts from “the sales of goods or services to be classified under operating cash flows” (U.S. Securities and Exchange Commission, 2005, p.1).

The categorization under cash flows is required irrespective of their sources, i.e., the collection of receivable, the sale of customer receivable, receivable from notes or accounts and irrespective of duration of collection (short-term or long-term) (U.S. Securities and Exchange Commission, 2005). It is imperative to note that there are no changes in the classification of the statement of cash flows based on the FASB 102 requirement (U.S. Securities and Exchange Commission, 2005).

The company should present the cash flows based on the GAAP standards. For instance, the company should not present cash flows when none from its consolidated subsidiaries is based on the sale of inventory. Similarly, it should not provide cash receipts from receivables based on the sale of inventory (U.S. Securities and Exchange Commission, 2005).

The company must indicate all sources of cash flows in the footnote disclosure. In addition, there should be an explanation about the nature of receivables and elements contained in the consolidated statements. At the same time, all items should be consistent with the description provided in the consolidated statement and the statement of cash flows (U.S. Securities and Exchange Commission, 2005).

Express Scripts, Inc. merged with Medco Health in 2012 (Express Scripts Inc, 2014). A merger could lead to changes of accountants (U.S. Securities and Exchange Commission, 2005). The company disclosed the ownership structure as “former ESI stockholders owned approximately 59% of Express Scripts and former Medco stockholders owned approximately 41% of Express Scripts” (Express Scripts, Inc., 2014, p. 48). All financial transactions after closing the major with references to “amounts for periods after the closing of the Merger on April 2, 2012 relate to Express Scripts” (Express Scripts, Inc., 2014, p. 48).

The company did not disclose whether Medco would continue to practice and report separately. In addition, Express Scripts, Inc. did not provide any explanations on any existing issues or issues that could arise because of the merger. If Medco continues in business as a subsidiary, then the holding company will have to clarify all issues related to auditing and reporting.

The company must watch also other compliance issues. For instance, Express Scripts, Inc. will have to continue to identify all its services and products and how every reported segment gets its incomes. In addition, the company must report all revenues from other external sources for all its products and services (U.S. Securities and Exchange Commission, 2005). The company should disaggregate all products and services, which are not primarily similar when reporting. It must explain, to a greater extent, what should be categorized as similar products or services, and may include additional information when disaggregating such products or services.

It must provide information related to geographies (Roberts, Weetman, & Gordon, 2008). This must cover all countries, including foreign ones in which it does business. A separate geography disclosure is mandatory for any country based on the segments and sources of the revenues. It may help analysts and readers to understand how various countries are performing financially (Ogiedu & Okafor, 2013).

The reconciliation of all segments is necessary in the financial statement with clear explanations on what constitutes all items captured in it. Any differences noted in the segments should be explained while any allocations within the segments must be noted and described (U.S. Securities and Exchange Commission, 2005).

The ethical and cross-cultural components of contemporary accounting and financial issues as required in the practice of financial economics

Encouraging employees to observe high ethical and culture standards in the contemporary accounting and financial issues is imperative for Express Scripts, Inc. This is a collective responsibility for all stakeholders in Express Scripts, Inc. Ethics and culture should complement the field of accounting and financial reporting in the company (Mgbodille & Onah, 2014). Individuals in Express Scripts, Inc. should practice cultural and ethical standards to promote acceptable business practices. However, in some instances, ethics and cultures have failed to promote good practices in the contemporary accounting and financial practice.

Self-interests have led to poor practices in the company. Express Scripts, Inc. will aim to maximize profits and ignore other diverse interests. For instance, Express Scripts, Inc. may rely on its financial department to generate revenues by manipulating assets and reporting practices (Federwisch, 2006). A lack of moral development in the company could lead to abuse of accounting and financial principles. While business exists to generate revenues for investors, it is imperative to question ethics and cultural practices that abuse established business standards.

The act of concealing financial information is illegal and immoral. However, some countries have poor laws against such practices, which perpetuate abuse of accounting and financial reporting systems. If Express Scripts, Inc., therefore, expands in foreign countries, it should observe strict cultural and ethical practices. It is also imperative to observe the law and engage in legitimate business activities. It should not evade taxes through complex accounting systems.

In some instances, professional standards may be in conflict with organizational cultural practices and demands. If senior executives of Express Scripts, Inc. engage in faulty rewards and claim huge allowances, then they may promote unethical behaviors in the company. Chinese companies are known to be corrupt. Such unethical practices undermine good accounting and financial practices.

Express Scripts, Inc.’s clients could also push the company’s employees to act in unethical ways. In some cases, senior executives expect accountants to ‘hide’ poor financial performances in accounting records. In such cases, Express Scripts, Inc. may use accounting methods that are not recognized when reporting to shareholders and filing returns.

Scholars have recognized that promoting “ethics and culture in accounting and finance professions remains critical for maintaining high standards in the profession” (Mgbodille & Onah, 2014, p. 95). It is therefore imperative for the company’s management accountants and financial analysts to focus on their staff and encourage ethical practices in reporting financial performances.

Employees should strictly adhere to accounting ethical practices, standards, observe the law, rules and codes of ethics in Express Scripts, Inc. to promote ethical and legitimate practices. In this regard, it is essential for Express Scripts, Inc. to monitor unacceptable ethical and cultural practices that promote economic and financial crimes. As Express Scripts, Inc. expands to the global market, it must understand diversity in cultures, possible unethical financial practices, as well as potential harms from such practices.

While individuals have the core responsibility of maintaining high ethical and moral standards in accounting and financial reporting, all other stakeholders also have critical roles to play in ensuring acceptable practices at Express Scripts, Inc. At the same time, the financial industry regulators have an imperative role of ensuring that Express Scripts, Inc. adheres to laws and regulations and accepted international accounting practices.

This would promote ethics and cultural practices in accounting and financial reporting. Still, management accountants and financial analysts must ensure that senior executives at the company do not interfere with accounting and reporting practices. Accountability, therefore, remains a relevant tool that can promote transparency at Express Scripts, Inc. If Express Scripts, Inc. has employees who can perpetuate fraud, then they must be monitored and any suspicious activities must be reported to the relevant authorities. The law should be stern on employees who abuse ethical and cultural practices.

Overall, Express Scripts, Inc. has acceptable ethical and cultural practices supported with laws and regulations to ensure that all employees comply with the required ethical code of conduct. In addition, the company promotes integrity and acceptable ethical and cultural practices through its reporting and filling systems.

Recommendations to the board

This study has analyzed financial statement of Express Scripts, Inc. (Express Scripts, Inc., 2011, 2012, 2014). The liquidity ratio shows that the company can meet its obligations through its current assets. Hence, it may not face bankruptcy and will be able to continue as a going concern. It also has good cash flows. However, over the years, shareholders’ equity has continued to rise steadily as the company borrows to fund its operations. This indicates that the company has not managed to maintain its profitability. It shows that Express Scripts, Inc. relies on shareholders’ equity for its growth.

• The company should reduce dependency on shareholders to fund its operations
• Express Scripts, Inc. should focus on revenue generation because of the decline in profitability in the last two years
• It should focus on asset and debt management
• Shareholders may continue to invest in the company because it is profitable and shows greater potential with the growing revenues

While Express Scripts, Inc. prepares its financial statements to conform to accounting standards accepted in the US, it must ensure full disclosure in the statement of cash flows and offer relevant explanations for all items included. The company lacks any serious financial problems related to reporting and accounting practices.

• It must continue to promote acceptable ethical and cultural practices in financial reporting

References

Express Scripts Inc. (2011). 2010 Annual Report. St. Louis, Missouri: Express Scripts, Inc.

Express Scripts Inc. (2012). 2011 Annual Report. St. Louis, Missouri: Express Scripts Holding Company.

Express Scripts Inc. (2014). 2013 Annual Report. St. Louis, MO: Express Scripts Holding Company.

Federwisch, A. (2006). Ethical Issues in the Financial Services Industry. Web.

Kieso, D., Weygandt, J., & Warfield, T. (2013). Intermediate Accounting. New York: Wiley.

Mgbodille, C., & Onah, E. (2014). Ethical and Cultural Issues in Accounting and Finance. Research Journal of Finance and Accounting, 5(6), 90-95.

Ogiedu, K., & Okafor, C. (2013). International Financial Reporting Standards: The Challenges of Definition of Adoption and Implementation. EBS Journal of Management Sciences, 1(1), 1-10.

Roberts, C., Weetman, P. & Gordon, P. (2008). International corporate Reporting. Harlow: Prentice Hall.

U.S. Securities and Exchange Commission. (2005). Current Accounting and Disclosure Issues in the Division of Corporation Finance. Web.

Whisenant, S., & Fairfield, P. (2000). Using Fundamental Analysis to Assess Earnings Quality: Evidence from the Center for Financial Research and Analysis. Journal of Accounting, Auditing & Finance, 16(4), 273-297. Web.