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Walt Disney Company Financial Analysis 1
Walt Disney CompanyFinancial Analysis
Managerial Finance BUSA 302Dr. Frederick Wolf
May 24, 2007
Completed By:Shanna BaumgartenMichaela BaylousLaura BucknerKari Gurtel
Walt Disney Company Financial Analysis 2
Table of Contents: Executive Summary . . . 3 Background . . . 3 Financial Statement Analysis . . . 5
o Balance Sheet . . . 5o Income Statement . . . 8o Cash Flow Statement . . . 9
Ratio Analysis . . . 10o Liquidity . . . 10o Profitability . . . 12o Activity . . . 12o Leverage . . . 14o Valuation . . . 15
Sales Forecast . . . 15o Projected Sales . . . 15o Forecast Earnings . . . 17o Pro Forma Statement . . . 17o Sustainable Growth . . . 18
Risk Assessment . . . 19o Economic Conditions . . .20o Changes in Consumer Demand & Preferences . . . 20o Changes in Regulation . . . 21o Intellectual Property Rights . . . 21o Employee Costs . . . 21o Pixar . . . 22o Interest Rates . . . 22o Foreign Exchange Rates . . . 22o Restrictions on Trade . . . 23o Taxes . . . 23
Financial Restructuring . . . 23 Recommendations to Management . . . 23 References . . . 26 Appendix . . . 27
Walt Disney Company Financial Analysis 3
Executive Summary:
The Walt Disney Company Financial Analysis details the finances at The Walt
Disney Company. The analysis includes a brief summary of the history of the company
along with important financial data to determine the value of the company. There is an
analysis of the financial statements, a genuine look at different ratios to consider before
investing, a sales forecast, possible risks facing the company, and recommendations to
management. Overall Disney seems to be a good company to invest in. They have some
concerns, but compared to other businesses in their industries, they are doing fine.
Background:
From its inception in 1923 The Walt Disney Company has always been a
company filled with imagination and ingenuity. This spirit was created by the company’s
founder Walter Elias Disney and it still thrives today in one of the most successful
entertainment businesses of all time.
On October 16, 1923 a New York distributor contracted with Disney to release
Alice’s Wonderland comedies. This is considered the official beginning of the Walt
Disney Studio. In 1927 Disney expanded and made an all cartoon series called Oswald
the Lucky Rabbit. This cartoon only lasted one year before Disney’s distributor went
behind his back and hired all of his animators. From here on out Disney made sure that
he owned everything he made instead of selling the rights to the distributors.
Walt Disney quickly rebounded from his betrayal in 1927 with the release of
Steamboat Willie on November 28, 1928. This was Mickey Mouse’s first cartoon. As the
cartoon gained success, consumer products quickly followed, which consisted of Mickey
Walt Disney Company Financial Analysis 4
Mouse dolls, dishes, toothbrushes, and figurines. The first Mickey Mouse book and
comic strips were published in 1930.
Snow White and the Seven Dwarfs was released in 1937. It was the first full
length animated movie. It held the record for highest grossing film until the release of
Gone with the Wind. Over the next several years Disney released Pinocchio, Fantasia,
Dumbo, and Bambi.
July 17, 1955 was a groundbreaking day in Disney history. This was the day that
Disneyland was opened, fulfilling one of Walt Disney’s greatest dreams. Since then,
Walt Disney World opened in 1971, Tokyo Disneyland in 1983, Disney Resort Paris in
1992, and most recently Disneyland Hong Kong.
Toy Story was created in 1995 through a Pixar/ Disney partnership and was the
first full length completely computer animated film. Since then they have done A Bug's
Life, Toy Story 2, Monsters, Inc., Finding Nemo, The Incredibles, and Cars. Finally,
Disney acquired Pixar in 2006.
In 1996 Disney acquired ABC; greatly expanding its media segment which is now
the most profitable segment of The Disney Corporation. They have created well know
shows such as Desperate Housewives and Grey’s Anatomy.
In October of 2005, Robert Iger, assumed the position of CEO at Disney and has
continued Disney’s success with record revenues in 2006. He is the seventh person to
ever lead the company in its history. Within weeks of becoming CEO, he arranged for
Disney to be the first to broadcast its TV shows over Apple’s iPod. As the time goes on
the public will wait and see what new things Disney comes up with, and hopefully it will
be truly amazing.
Walt Disney Company Financial Analysis 5
Financial Statement Analysis:
Balance Sheet
The Balance Sheet “is a financial snapshot, taken at a point in time, of all the
assets the company owns and all the claims against those assets.” (Higgins 2007) There
are a few important facts that can come from Disney’s Balance Sheet such as the book
value, working capital, debt, financial leverage, growth, increasing or decreasing debt,
and the worth of the company. The Book Value is equal to the number of shares out
standing multiplied by the book value per share which is:
Book Value = Book Value per share * Total number of shares outstandingBook Value = $16.125 * 23,537,000Book Value = $379,534,125
“Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.” (“Working Capital” 2007)
Working Capital = Current Assets – Current LiabilitiesWorking Capital = $9,562 - $10,210Working Capital = ($648)
The debt that the company has can also be found on Disney’s Balance Sheet. The debt is
the total liabilities.
Debt = Total Liabilities = $28,178
Financial leverage is how the company utilizes their money from debt. There
are three rations to analyze from the balance sheet. First, the asset-to-equity ratio is a
Walt Disney Company Financial Analysis 6
number that represents the capitalization of the company. A low asset-to-equity ratio,
about 1 to 3, implies high capitalization, while a high ratio implies low capitalization.
Disney’s financial leverage comes out to be 2.681, which is low, but it can be accounted
for by the type of industry it is, capital intensive. Disney’s capital intensity is involved in
the length of time movies take to create, props and computers for the movies, and theme
park rides and renovations.
Assets-to-Equity = Assets / EquityAssets-to-Equity = $59,998 / $22,377Assets-to-Equity = 2.681
Second, the debt-to-assets ratio measures how much of Disney’s assets are financed
though debt. A ratio less than one means most of the company’s assets are financed
through equity, while a ratio larger than one means Disney’s assets are primarily financed
through debt. Looking at Disney’s ratio:
Debt-to-Assets = Total Liabilities / Total AssetsDebt-to-Assets = $28,178 / $59998Debt-to-Assets = .469
Disney’s ratio is below one implying most of Disney’s assets are paid for by equity. The
third ratio is the debt-to-equity ratio. This ratio signifies what proportion of debt and
equity a company uses to finance its assets. A ratio over one hints at a riskier venture
because it includes financing with higher debt levels. A ratio under one denotes higher
financing with equity. Disney’s debt-to-equity ratio is:
Debt-to-Equity = Total Long Term Liabilities / Shareholders’ EquityDebt-to-Equity = $10,843 / $31,820Debt-to-Equity = .341
Walt Disney Company Financial Analysis 7
The .341 ratio suggests for every dollar Disney gets from shareholders for its assets,
Disney gets 34.1 cents in debt also. Disney maintains a total lower financial leverage, but
that is a good thing. Investors need not worry about creditors going after Disney.
Disney is in the mature stage of the company and has a slow to no growth ratio
because of that. Disney still continues to generate money and reinvest in itself including
new movies, new amusement park rides and the cruise lines. The company is also
showing a decreasing debt which can be seen in the debt-to-equity ratios of the past six
years. In general, as the years increase, the ratio decreases. This also demonstrates that
the company is slowly paying off its debt. Here is a graph to illustrate (see also
appendix):
Debt to Equity
0
0.1
0.2
0.3
0.4
0.5
0.6
2000 2002 2004 2006 2008
Year
Deb
t to
Equ
ity R
atio
Walt Disney Company Financial Analysis 8
The Company Worth is a valuable piece of information for Disney because it provides
the market value. This allows Disney to see how much they can sell the company for at
any given moment.
Company Worth = Shares outstanding * Price per shareCompany Worth = $36.02 * 23,537,000Company Worth = $847,802,740
Income Statement
The Disney Company can measure its profitability by using both ROA and
ROE. The ROE (Return on Equity) will show how efficiently a company uses its capital.
ROE = Net Income / Shareholders’ EquityROE = $3,374 / $22,377ROE = .1507 or 15.07%
Comparing this ROE with other companies in the same industry shows that Disney is in
the middle. Some competing companies include Six Flags (-28.28%), Dream Works
(1.79%), Time Warner (8.36%), Harrah’s Entertainment (8.51%), and MGM (18.02%).
(Yahoo Finance 2007) Another way to determine if Disney is a profitable company is to
look at the ROA (Return on Assets), which is a measure of the productivity of assets, or
income, divided by total assets. (Higgins 2007) This equation has a direct connection
with the assets of the company and does not use debt to increase the ratio like the ROE
does.
ROA = Net Income / AssetsROA = $3,374 / $59,997ROA = .056 or 5.6%
Comparing this ROA with other companies such as Six Flags (1.99%), Dream Works
(6.47%), Time Warner (4.10%), Harrah’s Entertainment (4.97%), and MGM (5.13%),
Disney is at the higher end of its competitors. (Yahoo Finance 2007) This suggests that
Walt Disney Company Financial Analysis 9
Disney has a high productivity of its assets. Disney can service its debt because they are
a mature company with a well recognized name who still generates revenue. This factor
can lead to external funding by a bank or other source to help in the financing its debt.
Another reason why Disney can service its debt is because it has a stable position in their
industry, which is not true of Six Flags.
One important mention: it is important to compare Disney’s ROA and ROE.
Here is a list of the previous ratios from 2002 through 2006 set side by side for
comparison:
Year ROA ROE2006 5.62% 15.08%2005 4.77% 19.06%2004 4.35% 18.84%2003 2.53% 10.42%2002 2.47% 10.21%
It is important to make sure that any company that has an increasing ROE has an
increasing ROA. If a company has a stable ROA and an increasing ROE, it means that
management is doing good business. Where as, if a company has an increasing ROE
with a decreasing ROA, it could mean trouble. The declining ROA implies an unstable
company and an increasing ROE can be deceiving. Disney’s ROA has been increasing
over the last several years, so it looks to be that Disney is right on track.
Cash Flow Statement
Disney has steadily increased its cash flow which has created cash efficiency of
their operations and the balance sheet. This increased cash flow has allowed Disney to
pay off debt in a reasonable amount of time and keep a moderate debt-to-equity ratio.
This increased cash flow has allowed Disney to be effective in its strategy of financial
Walt Disney Company Financial Analysis 10
operations and allowed the name of Disney to flourish. The company name is one of the
most recognized business names in the whole world. Even though Disney is in the
mature stage of its company life-cycle, it still generates money and positive cash flow
allowing reinvesting and paying of debt.
(Disney’s 2006 annual report)
Ratio Analysis:
Liquidity Ratios
The liquidity ratios consist of the current ratio (also called the working capital
ratio), the quick ratio/acid test, and the working capital. Liquidity is one determinant of a
company’s debt capacity and is an insight as to if an asset can be readily turned into cash
or if a liability must be repaid in the near future.
Walt Disney Company Financial Analysis 11
The current ratio is determined by current assets divided by current liabilities.
Disney’s current ratio is .94 times ($9,562 / $10,210) for Disney. Disney has a rather low
current ratio which means that they lack liquidity and cannot reduce it current assets for
cash. Most of Disney’s current assets are capital intensive as stated earlier.
The acid test or quick ratio is similar to the current ratio except that inventory
is reduced from the numerator because it is not very liquid, or not easily turned into cash.
The acid test is:
Acid Ratio = (Current assets – Inventory)/ Current LiabilitiesAcid Ratio = ($9,652 - $694) / $10,210Acid Ratio = .87 times
Any ratio under one signifies that the company cannot readily pay off their current
liabilities. That may be a concern for some, but with the intensive capital that Disney
works with, it can be overlooked. In addition, retail businesses, whose assets depend
greatly on inventory, have a large current ratio with a low acid ratio. Disney does
compete in the consumer products market along with other markets, so the small
difference between the two ratios is justified (www.investopedia.com).
Disney’s working capital is:
Working Capital = Current Assets - Current LiabilitiesWorking Capital = $9,562 - $10,210Working Capital = ($648)
Any company that has a negative amount for their working capital needs to be
investigated more closely. The negative value means that Disney cannot fund their short
term liabilities with their assets. A company that has one year with a negative working
capital might not be so significant, but Disney has had a negative working capital since
2003.
Walt Disney Company Financial Analysis 12
YearCurrent Assets
Current Liabilities
Working Capital
2006 $9,562 $10,210 ($648)2005 $8,845 $9,168 ($323)2004 $9,369 $11,059 ($1,690)2003 $8,314 $8,669 ($355)2002 $7,849 $7,819 $302001 $6,605 $6,020 $585
Disney may have some operational inefficiencies in that their money may be tied
up in their inventory, which may be because of their capital intensity. Disney’s accounts
receivable program may not be collecting at its best either (www.investopedia.com).
However, a negative working capital seems to be common with same industry companies
like Time Warner, Six Flags, Dreamworks, MGM, and Carnival Cruise Lines.
Profitability Ratios
The profitability ratios consist of net profit margin, returns on equity (ROE),
and return on assets (ROA). The ratios give investors some insight as to how well a
company does at creating profits.
The net profit margin shows how effective a company is at their cost control.
It demonstrates how well a company can turn its revenue into profits. The higher the
percentage for the net profit margin represents a higher effectiveness of cost control. The
margin is calculated by taking net profit over net revenues. Disney’s net profit margin is
$931 / $1555, or 60.7%, which is a good ratio.
As discussed earlier under the ratio analysis, the ROA for Disney is 5.6% and the
ROE is 15.07%. The ratios were comparable to industry ratios and with the two ratios
compared together, they look reasonable too.
Activity Ratios
Walt Disney Company Financial Analysis 13
The activity ratios are inventory turnover, average collection period, sales to
fixed assets, and total asset turnover.
The inventory turnover is Cost of Goods Sold divided by Ending Inventory.
Inventory Turnover = Cost of Goods Sold / Ending InventoryInventory Turnover = $28,807 / $694Inventory Turnover = 41.51
The easiest way to understand inventory turnover is to take the 41.51 and divide it by 365
days of the year. After doing that, the 8.79 answer received means that Disney’s
inventory sits in inventory for less than 9 days before being sold. That is not a bad ratio
considering the capital Disney is invested in.
The average collection period measures how well Disney does at collecting its
accounts receivable.
Average Collection Period = Accounts Receivable / Credit Sales per DayAverage Collection Period = $4,707 / ($34,285 / 365)Average Collection Period = 50.11 days
The average time between sale and receipt of cash for Disney is 50.11 days. For a retail
only store that ratio would be too big. Disney, however, is not only retail. The movie
industry has a very long collection period because it takes so long to make a movie and if
Disney has any other partners involved, the process gets more complicated.
The sales to fixed assets ratio is also known as the asset turnover ratio. It is an
important ratio for Disney because of their many long term assets such as theme parks
and studios.
Fixed Asset Turnover = Sales / Net Property, Plant, and EquipmentFixed Asset Turnover = $34,285 / $17,167Fixed Asset Turnover = 1.997
Walt Disney Company Financial Analysis 14
Disney has a high asset turnover ratio. The high ratio signifies that Disney is efficiently
using its fixed assets, and using them efficiently enough to continue to increase their
revenue (www.investopedia.com).
The total asset turnover ratio signifies how well a company is doing at converting
its assets into sales. Disney’s ratio, shown below, shows that for every dollar Disney has
in its assets, that dollar produces 57.1 cents revenue.
Total Asset Turnover Ratio = Revenue / AssetsTotal Asset Turnover Ratio = $34,285 / $59,998Total Asset Turnover Ratio = .571
The higher the ratio the better, but again, Disney is very much capital intensive. A
retailer would have a very different ratio.
Leverage Ratios
The interest coverage ratio tells an investor how well Disney can pay on its
interest expense. The ratio is derived from taking earnings before income tax, $5,447,
divided by interest expense, $119. The ratio equals 45.77, which is really good. A
company with this high of ratio means that they will have no problem paying off their
interest expense. It also says that Disney may have more financing through equity and/or
the debt that they do have is at a very good interest rate which would be reasonable for a
mature company (www.investopedia.com).
The cash flow to long term debt ratio takes the cash flow divided by long term
debt, which is $6,508 / $10,843. Disney’s ratio equals .559, which means that Disney has
more than half of its operating funds available to pay its long term obligations
(www.biznet.ca).
Walt Disney Company Financial Analysis 15
Long term debt-to-equity ratio was discussed earlier in the balance sheet
ratios. But to recap, Disney’s ratio is .341, which tells investors that Disney acquires a
small amount of debt, 34 cents, for every dollar it receives from shareholders.
Valuation Ratios
Disney’s valuation ratios consist of a dividend yield, dividend payout, stock
price over earnings per share, price to cash flows, and price over book value.
Disney does supply its investors with dividends. Disney’s dividend yield on yahoo
finance is .31 (90%). The yield ratio tells an investor how much money they could
receive per dollar they invest. The higher the ratio, the more money received. Disney’s
dividend payout is 15% according to yahoo finance. The dividend ratio tells a potential
investor how well Disney’s revenues support its dividends payouts. Mature companies
tend to have higher ratios, which, like Disney, they can afford to pay their investors their
current dividend payments.
The price per earnings ratio is 17.18 according to yahoo finance. The high number
tells investors that the market has high expectations of the firm’s future of financial
health (www.investopedia.com). The price over book value was 2.25 on yahoo finance
and if the value is too low, it can be a sign of underevaluation or something else wrong
with the company, but Disney has a reasonable price to book value.
Sales Forecast:
Projected Sales
Walt Disney Company Financial Analysis 16
Disney has had an increase in its sales for the last several years. The earnings
from 2001 through 2006 are presented on a graph below. The sales growth increased an
average of $1,823 million a year.
Projected Sales
$25,172 $25,329
$30,752$27,061
$31,944$34,285
$36,713
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Year
Do
llars
($
)
A regression analysis of the sales data gives an r2 value of .979, which is a very
good mark. The equation for predicted sales would be 2279.5 times the year needed
minus 4,538,243.8, and with the r2 value as high at it is, it means that whatever number
the equation comes up with will be very close to the actual sales. An r2 value of one
would represent a perfect solution, so an r2 of .979 is almost perfect. In addition, the line
of the graph shows a sturdy gradual growth, so the predicted sales of $36,713 of 2007
should be really close to the actual sales.
Walt Disney Company Financial Analysis 17
Forecast Earnings
Forecast Earings
$1,267$1,236
$2,345
($41)
$3,814
$3,374
$2,533
($500)$0
$500$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500
2000 2002 2004 2006 2008
Year
Dol
lar
($)
The earnings of Disney are not as linear as the sales are, so the predictability will
be less. However, the r2 value is still high. The earnings from 2001 through 2007 are
located on the graph above with the 2007 data being estimated. The equation for
prediction is 554.2 times the year minus 1,108,465.8, and the equation has an r2 value
of .931. The earnings estimation will not be as accurate as the sales, but it still only has
7% inaccuracy possibility, which is still good. Looking at the graph, the line is not so
straight and does fluctuate some, but earnings can change easily based on variable cost
and fixed costs.
Per Forma Statement
Disney does not distinguish the difference between their cost of goods sold and
their general fixed expenses. In doing so, the Performa statement located in the appendix
Walt Disney Company Financial Analysis 18
has been split into different percentages of costs. The first column is if the costs were
split 50/50 and so on. From the various possibilities of expenses, Disney will need close
to $15,000 in additional financing. The $15,000 in financing is required whether or not
the fixed and variable costs are split 50/50 or 25/75.
The external funding could come from retained earnings, stocks, or loans,
however, if the money needed to cover the funding does come from only retained
earnings, which currently rests at $22,625, it would leave the retained earnings with only
$6,000. Having a balance of $6,000 in retained earnings would satisfy some companies,
but for as large of a corporation that Disney is, they should keep more in retained
earnings. Outside sources like stocks or loans would be more beneficial.
Sustainable Growth
The graph above represents Disney’s sustainable growth rate. The sustainable
growth rate is the amount of growth Disney can handle without needing extra financing
or end up with too much extra cash. The white dots on the graph represent the last 5
Walt Disney Company Financial Analysis 19
years of growth Disney has experienced. In 2004 and 2005, the dots appear above the
linear line and imply that Disney suffered cash deficits in those years. The bottom three
dots from 2003, 2006, and currently in 2007, show that in those periods, Disney had cash
surpluses or excess cash.
If Disney does require external financing, a loan may be more appropriate just for
the fact that they have been in both cash deficits and cash surpluses in the past. If Disney
continues to fluctuate like that, they could pay off the loans when they get back into the
surplus again. The cycle could be ongoing, but as long as Disney stays on top and
manages their cash correctly, they should not have a problem.
Risk Assessment:
Disney is a large and very complex company spanning many different
entertainment types across the globe. Their entertainment mediums include movies,
television, radio, theme parks, cruise lines, and consumer products to complement all of
the above. Naturally, with many business lines, Disney is going to have many risks
associated with their ventures. Some of the most significant factors that could materially
affect the business include economic conditions, changes in consumer demands and
preferences, changes in FCC regulations or other applicable regulations, intellectual
property rights, changes in employee costs, Pixar’s acquisition, interest rates, foreign
exchange rates, restrictions on trade, and tax laws.
Walt Disney Company Financial Analysis 20
Economic Conditions
Entertainment is not a necessity for consumers by most measures and therefore is
often one of the first things cut when budgets start to get tight. This could result from an
overall economic slump or it could be from rising prices in other sectors such as energy.
Recently rising gas prices have put a strain on many people’s budget and they are now
trying to save money on other things that they don’t see as necessities. This means that
many people are not going to see movies as often, they are not buying new clothes or
other trinkets and consumer goods, and they are not going to go on a fancy vacation to
Disneyland. This means that while Disney’s own energy costs are rising, their revenues
are also declining as consumers spend their hard earned dollars on necessities.
Changes in Consumer Demand and Preferences
Most of Disney’s products and services require large capital investments, but
there is absolutely no guarantee that these investments will pay off. Consumer’s
demands and preferences can change very quickly and often in unexpected ways. For
example, Disney is considering putting an area in one or more of their theme parks based
on the movie Cars. This idea will take several years and many millions of dollars to
develop and build, but if in three years everybody has forgotten about the movie Cars and
has no interest, Disney’s investment will have been fruitless. As demonstrated by this
example, Disney’s success absolutely depends on their ability to meet customer demands.
Walt Disney Company Financial Analysis 21
Changes in Regulations
All radio and television networks are highly regulated by the FCC. The FCC is
responsible for licensing stations and limiting ownership of the stations; they prohibit
indecent exposure, restrict some verbal expressions, and limit the amount of advertising
during children’s programs. Disney’s media segment was its most profitable segment in
2006, but if the FCC were to substantially change their policy, they could have a very
large impact on Disney’s profitability. Other countries also have similar regulatory
agencies that control some of Disney’s actions, especially in regards to media. Disney is
also subject to many other regulations in regards to safety, privacy, and environmental
protection.
Intellectual Property Rights
Over the last several years, the available technology has greatly increased the
average consumers’ ability to download and use other people’s intellectual property. The
entertainment industry has been fairly hard hit by this because it has greatly reduced the
number of copies they can sell. Disney has been no exception to phenomenon and
therefore has needed to increase spending in order to protect their property rights, but the
risk for increased loss still exists.
Employee Costs
Many of Disney’s employees are covered by collective bargaining agreements.
This includes employees of their theme parks and resorts, writers, directors, actors,
production personnel and many others. As a result, labor disputes are always a risk. If a
Walt Disney Company Financial Analysis 22
dispute does occur it could significantly disrupt operations resulting in reduced revenues
and increased costs.
Healthcare costs are currently a major issue across the country because the costs
have been rising so rapidly. Disney currently employees over 130,000 employees, so
benefit costs of employees are very significantly affected by healthcare costs.
Pixar
In May of 2006, Disney acquired Pixar animation through an exchange of stock.
Both companies have been known for their success in animation and it is believed that
the combination of the two can be even more successful, but there is no guarantee of this
success. The acquisition in 2006 diluted Disney’s earnings per share and is expected to
do so again in 2007 and possibly in years to follow.
Interest Rates
Over the last few years, Disney has been actively working to reduce its debt and
lock in the remaining debt at low interest rates. Nevertheless, increases in interest rates
can significantly increase Disney’s debt service which will have an adverse affect on cash
flow and profitability. Increased interest rates also make it harder and more expensive to
obtain funding.
Foreign Exchange Rates
Disney has parks in Florida, California, Tokyo and Paris; offers cruises to the
Caribbean as well as a travel agency called Disney Adventures that will take customers to
such places as Spain, Italy, Costa Rica, and Ireland. This list just includes countries that
Walt Disney Company Financial Analysis 23
offer vacation destinations; not all of the countries that Disney conducts business in. For
this reason Disney’s profits on a venture can be very sensitive to exchange rates. If the
dollar becomes stronger than another currency, Disney’s goods and services may be too
expensive in comparison with other things, and then Disney will loose revenue.
Conversely, if the dollar becomes weaker, it may be more expensive for Disney to trade
in other countries which will also affect profits.
Restrictions on Trade
Countries are constantly changing quota and tariffs to try and put their own
country in a better position economically or politically. This is also done to try and
protect domestic industries. Disney’s trading between countries could be negatively
affected if a country changes their trade policies.
Taxes
In general, taxes are bad. They suck up profits that would have otherwise been
reinvested in the business or distributed to shareholders. If any of the governments that
Disney does business under decide to raise taxes, it could significantly reduce Disney’s
earnings.
Financial Restructuring:
It would not be economical for Disney to refinance its debt unless they can get a
lower interest rate. They are a mature company and get reasonable interest rates
currently. They could finance with additional equity because they appear to be a stable
company and they would be able to sell stock to potential investors, but debt would still
Walt Disney Company Financial Analysis 24
be a better choice. Disney currently gives their stockholders dividends of 31 cents per
share. It is a reasonable amount and I believe they should continue. I would only
recommend an increase if they have the cash flow to support it. Disney’s retained
earnings have been growing steadily in the last few years. However, as far as financing
goes, they should use outside financing instead of their retained earnings because they
need to keep a good amount of money in the company. Disney’s Debt to Equity ratio is
ok for now. It is comparable to other companies in their market sector.
Recommendations to Management:
Congratulations to the Disney Company and the Disney employees for giving the
world a great company. It seems that the company is headed in the right direction. Last
year the company produced record revenues and cash flows, but there are a few things to
watch out for. Disney needs to make sure that the acquisition of Pixar Animation Studios
goes well. The employees of Pixar may have a different culture, or working
environment, than Disney and Disney needs merge the cultures in a way to maximize
employee satisfaction, so not as to loose valuable employees. Disney and Pixar have
worked together in the past to make animated features, so they obviously know how to
work with each other, but they were never actually the same company.
Disney also needs to keep on top of the stock options for their employees. Disney
recently found backdated stock options that belonged to Steve Jobs from when he was
CEO of Pixar. Steve Jobs, seeing as how he is a member of the board of directors, needs
to set a good example for The Disney Company’s employees. He was also mentioned in
a Wall Street Journal article about backdated options at Apple. If Steve Jobs gets much
further into trouble, Disney will not want him on their board, because they do not want a
Walt Disney Company Financial Analysis 25
stereotypical name associated with them like Martha Stewart. Disney needs to continue
to train their employees about ethical issues so they know ethical integrity is a top
priority at Disney.
As Disney continues to grow, they will hopefully continue to lower their debt.
They have done a good job so far. They should keep financing down to a minimum. I
suggest, if financing is required in the future, use debt. Disney is a mature company and
has the credit rating and history to obtain favorable interest rates. When Disney has
excess cash they should use it to either pay down debt or buy back stock.
* Numbers above are in millions* All financial numbers concerning Disney were from Disney’s 2006 Annual Report
Walt Disney Company Financial Analysis 26
References:
Higgins, Robert C. (2007) Analysis for Financial Management. New York: McGraw-
Hill/Irwin.
Disney Dollar: http://aes.iupui.edu/rwise/banknotes/united_states/UsaDisneyPNL-
1DisneyDollar-2003A_f.jpg
Walt Disney Company Financial Analysis 27
Appendix:
Debt-to-equity = Long Term Liabilities / Shareholders’ Equity
Year Debt-to-Equity Ratio
2001 8,940 / 22,672 .39
2002 12,467 / 23,445 .53
2003 10,643 / 23,791 .45
2004 9,395 / 26,081 .36
2005 10,157 / 26,210 .39
2006 10,843 / 31,820 .34