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A Ratio Analysis of the Disney Company

Updated on March 31, 2014

In a competitive market, the stockholders and public measure the success of failure of a company in a number of ways; however, the company’s financial evaluations reveal whether the company will succeed and prosper or close its doors to the public. A complete financial analysis includes an examination of balance sheets, income statements, statements of stockholders equity, and a complete ratio analysis. However, for the purposes of this analysis, we will closely examine the Disney Company’s financial records in view of a complete ratio analysis. For this analysis, each ratio will be briefly defined, explained in terms of the Disney Conpany, and figures relayed to the reader, mostly 2012-2013 and years just prior to those years.

Ratios

One of the best guides to use in analyzing a company’s financial strengths and weaknesses are ratios. They provide investors, stockholders, managers, and other interested parties with tools for determining the company’s financial strengths and weaknesses. They can alert company leaders and investors to identify areas that may need additional investigation. Most importantly, correctly interpreted ratios provide tools for uncovering past and current trends that can lend valuable information regarding the company’s current and future financial health and stability. Skillful interpretation of these tools is essential in the completion of a correct financial analysis.

Gross profit margin. One may define a company’s gross profit margin as the difference between sales and the cost of goods sold divided by revenue. It represents the percentage of each dollar of a company’s revenue available after accounting for the cost of goods sold. Another definition of the gross profit margin of a business is “a measure to show how much of each sales dollar a company keeps” (McBride, 2013). An example of this term is if “a company has a gross profit margin of 75%, then for every $1 in sales, the company will keep 75 cents” (McBride 2013).

Kent (2013) describes the method for determining gross profit margin for a company. First, one subtracts revenues minus cost of goods sold, and then divides by revenues. When the gross profit margin is higher, the company is more profitable. Another example of gross profit margin: A company has revenues of $100 and cost of goods sold is $25. One would then subtract the $25 from the $100, and the result is $75. Finally, one would divide $75 by $100, and arrive at a gross profit margin of 75%.

A company’s gross profit margin is significant because it is one of the major indicators of the company’s financial health. It helps to provide information as to the company’s overall profitability. If a company is considering change, it can develop different scenarios before implementing changes (Kent, 2013).

In the past five years, the gross profit margin for the Walt Disney Company has fluctuated. For example, the gross profit margin on June 30, 2008, was 21.88%. On December 31, 2012, its gross profit margin was 18.45%, a decrease of 3.43%. In the past five years, the lowest gross profit margin for Disney was 12.88%, and that figure was on December 31, 2008. The low of December 31, 2008, came only six months after a June 2008 high of 21.88%. The Disney Company’s highest gross profit margin in the past five years was June 2012 with a maximum of 26.70% (Y-Charts, 2013).

Return on total assets. Return on assets (ROA) is an indicator of how profitable a company is in relation to its total assets. One calculates profitability ratio by dividing net income by total assets. The ROA indicates to some extent how efficient management is in using assets to generate income. When making comparisons among companies with ROA, one should compare similar companies because the ROA can vary widely among different companies. The assets of a company include both debt and equity, and both debt and equity are part of the funding of the company’s operation. Thus, management’s main financial role is to make wise use of a company’s assets by turning the investments into profit (The Free Dictionary-Farlex, 2013).

In 2010, the Disney Company’s ROA was 5.7%, in 2011, 6.66%, and in 2012, its ROA rose to 7.5%. By comparison, in 2010, the ROA for similar industries was 7.12%, in 2011, the ROA for similar industries was 7.93%, and in 2012, similar industries reported a ROA of 7.67%. The ROA percentages indicate that Walt Disney Company’s ROA improved from 2010 to 2011 and from 2011 to 2012.

Return on equity. The return on equity (ROE) provides a general indication of a company’s efficiency. In other words, the ROE determines how much profit it is able to generate given the resources provided by its stockholders. The ROE is “a measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year’s after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage” http://www.investorwords.com/4248/Return_on_Equity.html#ixzz2Qq56tJQ1,2013

Over the past five years, the figures for the Disney Company reveal the maximum ROE was 14.54% in June 2008, and the minimum ROE was in December 2009. The company’s ROE averaged 11.83% from 2008 through 2009. On December 31, 2012, the OA for the Disney Company yielded 13.54%, a ROE percentage that increased slightly from previous years. The company ranks in the 64th percentile among similar media companies and places at number 15 of 42 among similar companies (diversified) (CSI Market, 2012. http://csimarket.com/stocks/singleManagementEffectivenessroey.php?code=DIS )

Earnings per share. The earnings per share (EPS) figure is significant for a company because it is a major indication of the overall financial health of a company. It may be one of the most important indicators for determining the price per share of stock. Many financial analysts consider the EPS to be a major component used to calculate the price-to-earnings valuation ration. To calculate earnings per share (EPS), one should first subtract the dividends on preferred stock from the amount of the net income and then divide that difference by the number of outstanding shares.

The Disney Company’s EPS has been growing over the past five years at an annual rate of 10%. This growth is even more remarkable because it occurred during difficult economic times. If this EPS growth trend continues, analysts estimate that Disney will grow its EPS by 15% a year during the next five years. The price per share of Disney stock in April 2013 indicates that this projection may well be a valid one. Disney shares traded at $42 a share and a P/E of 16 in April 2013, figures that align well with that type future growth. Therefore, it is possible that Disney shares could yield an annual return of 155 over the next five years.

Current ratio. With regard to a company’s financial stability, the current ratio is significant because it is an indication of the organization’s ability to meet its short-term debt obligations. In other words, if the current ratio is high, the company has more liquid assets that it can use to meet the current debt obligations. To determine the current ratio, divide the current assets by current liabilities. The company is likely to have difficulty meeting its short-term debts if its current liabilities are greater than its current assets. Therefore, most short-term creditors prefer a high current ratio because it lowers their risk as creditors (investorwords.com, 2013, http://www.investorwords.com/1258/current_ratio.html#ixzz2RJHeZyEw )

Surprisingly, the Walt Disney Company’s recently published financial statements indicate that this company has a current ratio of 0.99 times. This ratio is 57.69% lower than that of Services sector and 80.36% lower than that of Entertainment-Diversified industry. The Walt Disney Company’s current ratio of 0.99 times is surprising because of this company’s apparent success in other financial areas. Disney’s rating in this area is below average in current ratio categories among related companies.

Debt to assets ratio. One can calculate the debt to assets ratio by dividing the total debt by the total assets of a company. To get the total assets, one must find the current assets and the noncurrent assets and report these figures on the company’s financial statements. The total assets include both current and noncurrent assets. For example, the total assets would include all money in cash, in accounts receivable, and in interest receivable. It would also include the amount of money in property, plant, and equipment. The sum of all these assets provides the total assets for the firm.

To analyze the debt to asset ratio, investors usually consider that a ratio above 1 indicates that the company is using debt to finance the operation of the company. A debt to assets ratio below 1 probably indicates that the company uses equity to finance the company more than debt, and it indicates that the company has more assets than debt.

The Disney Company’s debt to asset ratio on December 31, 2012, was .4254, and on December 31, 2011, that figure was .3861. On December 31, 2010, Disney’s debt to asset ratio was at .3375 (Y-Charts, 2013). Since Disney’s debt to asset ratio for the past three years fell below a ratio of 1, the indications are that the company is using equity to finance the company more than debt. It also indicates that Disney has more assets than debt. The past three years indicate a slight trend toward a lower debt to asset ratio, and that trend is a positive one for Disney and for its investors.

Inventory turnover. The figures for inventory turnover are significant for a company because this ratio measures the number of times a company sells its inventory during the year. Therefore, a high inventory turnover rate indicates that the company is selling its product well, while a low inventory turnover rate means that the company is not selling its product well. One can calculate inventory turnover ratio in two ways. The first formula: Inventory Turnover Ratio = (Sales/Inventory). The second method probably gives a more accurate picture of the financial health of the company in terms of inventory turnover because it eliminates the gross profit from consideration. The second formula is to divide the cost of goods sold by the inventory: Inventory Turnover Ratio Formula = Cost of Goods Sold/ Inventory (CSI Market, 2013).

For the Walt Disney Company, the inventory turnover ratio in December 2011 was 21.54, but it increased to 22.85 by December 31, 2012. When comparing the ITT Ratio of the Disney Company to “Within Services sector 10 other companies report a higher inventory turnover ratio. However, the Disney Company’s inventory turnover ratio has shown a slight increase in total ranking among similar companies. It has improved so far to 36 in total ranking. The previous quarter, the Disney Company’s total ranking among similar companies in inventory turnover ratio was at 49. In 2007, the Disney Company’s inventory turnover ratio was 45.54, so the overall statistics from 2007 to 2012 indicate that Disney’s inventory turnover ratio has decreased considerably since 2007. However, the company has shown a slight increase from 2011 to 2012 (CSI Market, 2013, http://csimarket.com/stocks/singleEfficiencyit.php?code=DIS

Price earnings ratio. Of all the ratios used by financial analysts, the price earnings ratio (P/E ratio) is probably the most widely used in determining the value of a company’s stocks. It is not, however, the only financial indication of the value of a stock. There are multiple versions of the price earnings ratio, but the following formula is one of the most basic formulas used to determine the price earnings ratio of a company. One can calculate P/E by taking the share price and dividing it by the company’s earnings per share (EPS). The formula for determining price per earnings per share is as follows: P/E = Stock Price/EPS.

For April 2013, the Walt Disney Company’s price earnings ratio (P/E ratio) was at 20.33, which was the S & P 500 cyclically adjusted price-earnings. On December 31, 2012, the adjusted price-earnings ratio was 21.34, and on December 31, 2011, this figure was 20.52. In April 2011, the Disney cyclically adjusted price-earnings was 23.14. The price per share of Disney stock has dropped slightly from April 2011 until April 2013. The April 2013 figure represents a decline of 2.81 points since April 2011 (Y-Charts, April 2013).

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    • simondixie profile image
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      Nancy McLendon Scott 3 years ago from Georgia

      Thank you!

    • teaches12345 profile image

      Dianna Mendez 3 years ago

      Very useful information for market analysis.