The financial analysis determines the most effective ways to maintain or increase the enterprise’s profitability. The main tasks are to analyze the profitability and assess the company’s risks. Financial ratio analysis allows the managers to understand the organization’s competitive position at the current time. One of the sources of required data is public reports of companies. They contain various numbers; consequently, examining this information provides knowledge on how effectively and efficiently the company and competitors perform.
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The report aims to discuss the company and its financial performance using the financial ratios analysis approach. It is essential to critically evaluate the purpose and use of the annual report and financial statements. The organization chosen is The Walt Disney Company. It is the largest American holding in the entertainment and media industry listed in The New York Stock Exchange. Disney Company has practically no analogs, similar in scale and profile of activity. The company’s direct competitors in the media business are large media conglomerates Viacom Inc, Time Warner, Universal Pictures. In media content creation – the main competitor is DreamWorks; in the entertainment industry, these are Blackstone Group, Six Flags Inc, Cedar Fair LP and Comcast Corporation. The strong position of Disney is associated with a well-known brand, scale of activity, significant experience in all segments, and understanding the needs of the target client.
The analysis is performed based on information gathered from The Walt Disney Company’s annual financial reports of 2020 and 2019. The usefulness of the financial ratio is determined by the tasks set. First of all, the ratios make it possible to see modifications in the financial position or results of production activities. They also help determine the trends and structure of planned changes, enabling management to see the threats and opportunities inherent in The Walt Disney Company. The report consists of four parts: the introduction, problem identification, critical discussion and conclusion.
Overall, the company’s financial statements are a source of information about the company for all stakeholders. It is crucial for practical ratio analysis to understand the basic characteristics of the financial statements and the indicators. However, when conducting financial analysis, it is essential to consider that the purpose is not to calculate ratios but the ability to interpret the results obtained. The assessment of performance is made based on data from past periods, and on this evidence, extrapolation of the company’s future development may be incorrect.
The Walt Disney Company Background
The Walt Disney Company is an international leader in the entertainment industry, being of the world’s topmost valuable brands. The world-famous company has a widely diversified business, operating in various segments. The company operates cable TV businesses under the ESPN, Disney and Freeform brands, broadcasters, including ABC, National Geographic, and radio hosts throughout the United States and Latin America (The Walt Disney Company, 2020). More than 100 Disney TV channels are broadcast in 34 languages and 164 countries globally (The Walt Disney Company, 2020). Furthermore, the company owns and operates Walt Disney World Resort in Florida and Disneyland Resort in California. Internationally, Disney-branded complexes in Paris, Hong Kong, Shanghai, Tokyo (The Walt Disney Company, 2020). The company’s activities also include creating media content such as cartoons, feature films, music recording, TV programs, talk shows, and mobile game development.
The company is a recognizable brand with strong operating performance and growth rates regarding its history. The company is known for its Walt Disney Studios: Walt Disney Pictures, Walt Disney Animation Studios, Pixar, Marvel Studios, Lucasfilm, 20th Century Fox, Fox Searchlight Pictures and Blue Sky Studios (The Walt Disney Company, 2020). In 2014, a deal was made to purchase Maker Studios, the largest network of YouTube channels (Backaler, 2018). As a result, the Walt Disney Company gained access to the latest digital technologies and unique expertise that measure the interaction of modern users with the short video format (Backaler, 2018). However, the company has faced problems with dynamic growth targets at the same time and challenges with creating original content.
The area where the company is actively developing is streaming services. For instance, Disney + is the exclusive showcase for new products from Walt Disney Studios. It reached 74 million subscribers in October 2020 and became a promising development (The Walt Disney Company, 2020). Consequently, the critical factor impacting the company’s performance is to invest even more effort and content money to keep this project working and develop it. In accordance with Hulu and ESPN +, Disney has attracted over 100 million worldwide subscribers since launching its primary streaming service by the end of 2020 (The Walt Disney Company, 2020). Investors are looking beyond the unfortunate quarter and waiting for parks to reopen, while Disney + expects earnings growth to resume.
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However, compared to 2019, in 2020, The Walt Disney Company has experienced a profit decline due to the COVID-19 pandemic outbreak. As follows from the company’s report, in the second quarter of 2020, the company’s net profit was about $ 475 million, while in 2019, this figure was $ 5.4 billion for the same period (The Walt Disney Company, 2020). Amid the epidemic, the company was forced to temporarily suspend the operation of all its amusement parks and freeze the filming of new films and TV series. As a result, the service revenues decreased 2%, which is $1.3 billion (The Walt Disney Company, 2020). This decline was compensated by a rise in subscription revenue from Disney+ (The Walt Disney Company, 2020). Product revenues also decreased by 32%, or $2.9 billion (The Walt Disney Company, 2020). The sharp drop in profits is explained by the restrictions imposed due to the spread of coronavirus in the United States and the world.
Financial Performance Analysis Techniques
Regarding financial performance analysis techniques, financial ratios analysis is used in the report. Financial ratios are indicators that are calculated based on the company’s statements. These coefficients measure various aspects of a business, according to the organization’s annual reports. Ratios characterizing the performance of the enterprise are interconnected. For instance, it is impossible to correctly assess the level of financial stability of an enterprise without analyzing the dynamics of profitability and liquidity, activity and debts (Rashid, 2018). For effective analyzing the financial condition, it is necessary to assess the qualitative interdependence of all economic indicators. In order to avoid mistakes in the company’s management, it is required to conduct constant analysis and correction of the company’s financial ratios. The economic capabilities are defined by business creditworthiness and investment potential, being the main objectives of the financial ratio analysis (Mubashir and Bin Tariq, 2017). The data obtained can help CEOs to make the right decisions promptly.
Each organization has its priorities in the analysis of reporting, but the general algorithm remains unchanged. At the discretion of the leading positions of the accounting department, the calculation of the state may not be made for all parameters. Only sections where financial problems are regarded as potential ones need to be identified and resolved as soon as possible are taken into circulation (Rashid, 2018). In the case of The Walt Disney Company, the following groups of analytical financial ratios are used: liquidity ratios, profitability ratios, turnover of assets, debt ratios.
The principal indicators characterizing the financial condition of the enterprise are the profitability and liquidity ratios. Moreover, the concept of profitability is broader than the concept of liquidity. It is understood as the company’s ability to fully fulfill its payment obligations and the availability of funds necessary and sufficient to meet these obligations (Mubashir and Bin Tariq, 2017). The term liquidity means the ease of implementation, sales, the transformation of material assets into cash.
Overall, analysis of financial ratios is a tool that provides an idea of the financial condition of the organization, its competitive advantages and development prospects. Such an approach offers complete performance analysis, assessment of market business trends, rethinking alternative business strategies, and monitoring the company’s progress. Profitability ratios are analyzed in terms of the change in productivity in terms of net profit, use of capital and control of the level of costs (Mubashir and Bin Tariq, 2017). The financial liquidity and stability of the enterprise through the effective use of the system of assets and liabilities also can be determined (Mubashir and Bin Tariq, 2017). By changing the coefficients in the business plan, it is possible to evaluate alternative options for the company’s development (Mubashir and Bin Tariq, 2017). Finally, having chosen the optimal business strategy, the company’s managers, continuing to study and analyze the main current ratios, can see the deviation from the planned indicators of the implemented development strategy.
Due to the COVID-19 pandemic outbreak, there is a decrease in the attendance of amusement parks. However, Disney’s quarterly earnings of 8 cents per share on an adjusted basis beat expectations for a 64-cent loss; consequently, it pushed the stock up 5% (The Walt Disney Company, 2020). The company incurred expenses of nearly $ 5 billion (The Walt Disney Company, 2020). COVID-19 deprived Disney of $ 3.5 billion in operating profit due to idle branded amusement parks worldwide (The Walt Disney Company, 2020). The closure of theme parks from April to June in 2020 resulted in an operating loss of $ 1.96 billion in the parks and consumer goods segment (The Walt Disney Company, 2020). Overall, the company’s movie studio operating profit fell 16% to $ 668 million as many cinemas remained closed (The Walt Disney Company, 2020). Thus, in 2020, The Walt Disney Company has faced growing accounts payable, increased government regulation of the sector, increasing competition among video streaming platforms.
The critical components of the analysis of the state should include the solvency of the company and its liquidity. The term liquidity indicates the availability of financial security to cover unforeseen items of expenditure by the firm; as a result, investors pay attention to this ratio first (Mubashir and Bin Tariq, 2017). Therefore, the first ratio that should be calculated is liquidity ratios in the analysis of the financial condition of the Walt Disney Company. Liquidity is a complex section that identifies the possibility of debt repayment for any outcome, even with time delays.
The key factor is the predominance of active funds over passive ones in the organization’s financial condition. The current ratio is estimated by dividing the current assets by the current liabilities; for Disney, it is determined as 35,251/26,628 = 1.3238 (The Walt Disney Company, 2020). The reason for calculating this indicator is that the company pays off short-term liabilities mainly at the expense of current assets; therefore, if the current assets exceed the current liabilities, the enterprise can be considered as successfully operating. The optimal figure is 2 or more; however, in world practice, it is allowed to reduce this indicator for some industries to 1.5 (Mubashir and Bin Tariq, 2017). In the Walt Disney Company, the current ratio is 1.3238, which means that the company is in an unprofitable position in the market (The Walt Disney Company, 2020). If the downward persists, the value below the norm indicates the probable difficulties in repaying the organization of its current liabilities.
Profitability ratios are defined as indicators reflecting the degree of efficiency of the enterprise. These ratios are relative and measure the profitability of various enterprise systems. For instance, Gross Profit Ratio (GP) is one of the most important indicators obtained from the income statement. It shows the profit remaining after subtracting all variable costs from income. The formula is Gross Profit = Gross Profit / Net Sales (Mubashir and Bin Tariq, 2017). The Walt Disney company’s gross profit ratio is 32.89, which is less than 2019 with 39.57 (The Walt Disney Company, 2020). The ratio shows the efficiency of the production process in terms of prices and production volumes.
Another profitability ratio is the return on sales (ROS) so-called operating margin that shows the profit share in every dollar earned. It is usually calculated as the net profit ratio for a given period to cash-based sales for the same period. It is estimated as ROS = Net profit / Sales revenue (Mubashir and Bin Tariq, 2017). For Disney, it was -2.9684 in 2020; for comparison, in 2019, ROS was 15.2959 (The Walt Disney Company, 2020, The Walt Disney Company, 2019). Operating margin is an indicator of a company’s pricing policy and its ability to control costs. Thus, if the gross profit ratio has fallen, then it is evident that there has been an increase in the cost of products sold compared with the proceeds from sales. The latter, in turn, can be caused by falling prices or insufficient use of returns to scale production.
Asset turnover is a financial indicator of the intensity of the organization’s use of the entire set of available assets. The ratio is calculated by Net Sales divided by Total Assets; in the Walt Disney Company, it is 0.3244 in 2020 and 0.3538 in 2019 (The Walt Disney Company, 2020). There is no standard for turnover ratios since they depend on the market characteristics of the production organization. In capital-intensive industries, asset turnover will be lower than in trade or services. In Disney’s case, higher asset turnover is recommended as low turnover may indicate low efficiency in the use of assets. In addition, the turnover depends on the rate of ROS. With high profitability, the asset turnover is usually lower, and with a low profitability rate, it is higher.
The debt ratio measures how effectively the organization has used debt as a source of funding. For almost any business, debt capital is the most common source of financing for operating and investment activities. In order to take a new loan from the bank, the CFO has to prove to the credit institution that the company will cope with the increasing debt burden, that it is able to pay off all its obligations on time.
One of the indicators that banks pay close attention to when assessing the financial independence of a company is the debt burden ratio. Crucial ratios are Debt to Equity Ratio = Long-term Debt + Value of Leases / Average Shareholders Equity, and Long-term Debt to Equity = Long-term Debt / Average Shareholders Equity (Husna and Satria, 2019). The first is estimated as 0.6642, and the latter is 0.3748 (The Walt Disney Company, 2020). If the Debt to Equity Ratio is less than 1, it means that the company’s assets are financed to a greater extent by equity capital. Concerning Long-term Debt to Equity, banks prefer low leverage ratios for borrowers because, in such a situation, banks are better protected in the event of bankruptcy of the recipient of the loan. From the shareholders’ point of view, high leverage values are preferable, which increases the return on investment.
Financial ratios have been an integral part of the analysis of financial statements. The primary way to determine the profitability and liquidity of the company is through the financial ratio analysis. The indicators of the financial analysis of the enterprise allow it to assess its current state, opportunities and problems. This valuable information is used both for making management decisions and for developing a strategy. Investors, shareholders, business owners are also interested in obtaining such information. Therefore, each company needs a specialist who, based on the reports’ data, can form adequate conclusions about the results of activities and make reasonable forecasts.
The Walt Disney Company’s business is broadly diversified, both in terms of geography and industry segments. The structure includes various companies, including ABC-International Television, ESPN, Lucasfilm, MARVEL, Pixar, Maker Studios, TouchStone (The Walt Disney Company, 2020). Disney is one of the largest Hollywood studios, having eleven theme parks and two water parks, and several broadcasting networks, including the American Broadcasting Company (The Walt Disney Company, 2020). The losses of the Walt Disney Corporation from the COVID-19 pandemic in the past quarter were considerable due to closing theme parks during the epidemic. Even though four out of six theme park resorts worldwide have opened, social distancing rules have limited attendance.
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Concerning The Walt Disney Company’s financial performance, the business posted a net loss in 2020. For the fiscal year ended October 2020, the company received $ 2.8 billion in losses against a profit of $ 10.4 billion in 2019 (The Walt Disney Company, 2020). The company’s revenue for the year decreased by 6%, to $ 65.4 billion (The Walt Disney Company, 2020). The liquidity ratio, in particular the current ratio, is estimated at 1.3238 (The Walt Disney Company, 2020). It is below the optimal figure, so the business is a risk. Profitability ratios such as Gross Profit Ratio (GP) and the return on sales (ROS) show that the profit has been decreasing from 2019 and fell in 2020 (The Walt Disney Company, 2020). The Walt Disney Company’s products can be considered inefficient. Regarding activity ratios, it is suggested to increase asset turnover as low turnover indicates insufficient use of assets. Finally, the debt ratio is less than 1, which is preferable by banks as the company will be able to compensate for loans in case of bankruptcy. However, for shareholders, a low debt ratio is not beneficial as it does not increase the return on investment.
Moreover, by analyzing the dynamics of financial ratios over several years, it is possible to study the effectiveness of trends in the existing business strategy. Moreover, the COVID-19 pandemic has changed consumer behavior and expectations of retail stores. The business has strived to operate where consumers are already spending their time, notably by expanding the network of Disney Stores around the world. At present, The Walt Disney Company plans to provide customers with easier access to the unique, high-quality products of all our e-commerce franchises.
Thus, the pandemic has negatively affected Disney due to parks and movie theaters closures, impacting the company’s stock. However, The Walt Disney Company has addressed the total failure that some investors feared due to the business being paralyzed by the pandemic. Management has found a solution, which is a plan to strengthen Disney’s position in the video streaming market. This is a necessary step for diversification, and as other Disney destinations recover, streaming will become an additional source of solid income. In the long term, both Disney + and Hulu from 21st Century Fox should pay off in the form of additional revenue for the company, but that will take time to see results.
Backaler, J. (2018) ‘Know the risks: The dark side of influencer collaboration’ In Digital Influence. Cham: Palgrave Macmillan, pp. 137-154.
Husna, A. and Satria, I. (2019) ‘Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value’, International Journal of Economics and Financial Issues, 9(5), pp. 50-54.
Mubashir, A. and Bin Tariq, D. (2017) ‘Application of financial ratios as a firm’s key performance and failure indicator: Literature review’, Journal of Global Economics, Management and Business Research, 8(1), pp. 18-27.
Rashid, C. A. (2018) ‘Efficiency of financial ratios analysis for evaluating companies’ liquidity’, International Journal of Social Sciences & Educational Studies, 4(4), 110-123.
The Walt Disney Company. (2019) Fiscal Year 2019 Annual Financial Report. Web.
The Walt Disney Company. (2020) Fiscal Year 2020 Annual Financial Report. Web.