(Financial and SWOT analysis and Recommendation to Identified Problems)
Background
The Walt Disney Company is an American diversified firm which focuses its business in mass media where it offers licensing services for the populace to consume their products among other services. Walt Disney headquarter is at Walt Disney Studios in Burbank, California. The firm was founded on October 16th, 1923 by Walt Disney and Roy O Walt Disney in Los Angeles, California. In its most recent full year financial statements, 2015 financial statement, the firm posted a net income of US$8.38 billion, operating income of US$14.68 billion and revenue of US$52.46 billion which was an improvement from the previous year financial performance. The firm also recorded an asset base of US$88.18 billion and a capital base of US$48.65 billion (Investor Relations - Stock Information, n.d.). To drive this level of performance, the firm has employed 180,000 people worldwide and divided its business into various divisions. From the brief, the firm gives a good indication of a good prospect. Nonetheless, for an investor, one will need to conduct thorough analyses in order to ensure that the general outlook does not mislead the investor (Investor Relations - Stock Information, n.d.). As such, the firm is analyzed in order to decode a clearer meaning of the summary provided.
Financial Analysis
Revenue Generation
Revenue generation is one of the fundamental attributes that an investor will consider when evaluating the financial health of the company. Although by itself nothing much can be deduced, its trend shows whether the firm is increasing its revenues over time since a trend showing falling revenue is a negative insight about the company. It, therefore, goes without saying that a positive gradient of the revenue curve is a positive attribute to a company. The graph below summarizes Walt Disney revenue curve.
The graphs show that the firm has a positive gradient in relation to revenue generation curve. Revenue generation shows the firm ability to utilize its assets and rewards its shareholders. As such, this shows that the firm has a high capability to utilize the asset and generate increasing revenue over time; a view that will be further examined using ratios. Considering the future outlook of the firm, fitting the historical data to 4th-degree polynomial, the firm is projected to continue registering increased revenue in the next five years.
Ratio Analysis
Bare figures presented in the financial statement will only have meaning when they are subjected to analysis. Ratio analysis presents a good insight into the financial soundness of the firm although they are backward looking. Nonetheless, understanding the financial history of the firm presents a reasonable foundation of making a decision regarding the future outlook of the firm. As such, the financial ratios are used to examine the historical liquidity ability, profitability ability, activity efficiency and identify weakness in the organization financials or the organization as a whole (Fridson & Alvarez, 2011). However, to better understand the firm, Walt Disney performance is compared to its closest rival, Comcast. Although the industrial averages could be used, it is better to compare the firm to its closest rival to understand how well the firm is performing compared to a comparable competitor.
Liquidity Ratio
The going concern concept is pegged on the ability of an organization to meets its obligation when and as they fall due. Otherwise, the firm will be declared insolvent which will lead to bankruptcy and ultimately liquidation. In order to ensure the firm survives, it is paramount to ensure that adequate liquidity is maintained. Consequently, the firm must always analyze its liquidity ratio using various ratios mainly current ratio, quick ratio and Cash ratio.
The current ratio is one of the liquidity ratios that measures liquidity by dividing the current asset by the current liabilities (Drake & Fabozzi, 2012). In other words, this ratio measures the liabilities a portion of the firm’s current assets. Therefore, it gives the firm’s position on its ability to repay it current liabilities from liquidating its current liabilities. A current ratio that is less than one is dangerous for any company since it implies that if the current liabilities of the firm were to be demanded at once, it means that the firm will not have adequate liquidity to meet this obligation which is a threat to the continuity of its operation. As such, considering the financial statement relating to Walt Disney, for the three years under consideration, the firm has a current ratio that is above one. As such, the firm has the capability to meet its current liability obligation as and when they fall due. In theory, many practitioners and academic suggest that a current ratio of two should be considered ideal although there is no general consensus as to which value is ideal. Also, a high value of greater than three does not guarantee on financial safety of the firm's ability to meets obligation but rather shows a weakness in the firm's ability to utilize its assets efficiently. As such, this could justify why the value of two is a considerably ideal standard in relation to the current ratio. Therefore, it will mean that although Walt Disney is not in the danger zone, it is significantly below the ideal value of two. However, comparing the firm values with its closest rival, the firm is fairing much better in managing its liquidity since not only is Comcast’s current ratio value below one but also way below the recommended ratio of two in all the four years considered. In addition, considering the trend, Walt Disney’s current ratio is stagnating around a value slightly above one. However, Comcast’s current ratio is declining thus showing a case in which its liquidity is deteriorating.
Liquidity is further analyzed using the quick ratio which is also called the acid test ratio. In the current ratio, the ratio considered the inventory of an organization. However, in times of liquidity distress, it means that the firm is unable to generate revenues because the products are not selling. As such, in such a case, inventories would not be a good source of immediate funds to meet the firm’s obligation. Consequently, it is eliminated from the quick test ratio. A quick ratio of one is considered to be sufficient to ensure the firm has adequate liquidity to meet its obligation while as a value of less than one is considered to be dangerous. Considering Walt Disney financial statement, the firm has a quick test ratio value close to one with three out the four years considered recording a value slightly higher than one. It means that the firm has a prudent liquidity management framework which ensures that the firm has the ability to sustain adequate liquidity. Comparing the firm’s acid test value with its closest rival, Comcast has a lower Acid test in all the four years under review. As such, it means that Walt Disney has a better strategy compared to Comcast in relation to liquidity management. Also, Comcast value is below the value of one implying that the firm cannot manage to meet its obligation with the current level of current assets excluding inventory.
Finally, liquidity can be understood using the cash ratio. For a firm to meet its obligation, the liabilities are settled in cash terms. As such, it is paramount to understand the amount that the firm has which can be used to promptly pay the current liabilities were they to arise at a given time. Cash ratio is used to understand this situation. Cash ratio shows the proportion that the cash and cash equivalent can cover without further liquidating any additional current asset. Considering the financial statements of Walt Disney, on average, 20% of Walt Disney’s current liabilities can be covered using the cash and cash equivalent at the end of each year. In such a case, the firm would only need to liquidate current assets that will match the remaining 80% of liabilities. On the other hand, comparing Walt Disney to Comcast, Comcast has a fluctuating cash ratio which is as high as 0.65 in 2012 and as low as 0.09 in 2013. Therefore, there is no consistency in managing cash balances in Comcast which is the opposite scenario in Walt Disney where the cash ratio is in the range of 0.2 and 0.25 in the four years considered.
Solvency Ratio
A company may be highly liquid but faces the threat of insolvency. In other words, liquidity does not guarantee solvency thus for a firm to remain competitive and successful, the firm must ensure that it is both liquid and solvent. Nonetheless, the two ratios are geared to ensure that the firm can meet its obligation to ensure its survival and competitiveness. Key solvency ratios are summarized below.
Debt to equity is one of the key solvency ratios. The ratio measures the gearing ratio of the firm since it measures the financial leverage that a business is using. The ratio is important since it helps to understand how the firm is structuring its capital structure. There is no ideal capital structure. Nonetheless, the best capital structure that a firm will employ is the structure that reduces the weighted cost of funds (Fridson & Alvarez, 2011). In the event of increasing debt and costs of debt, it means that the weighted cost of capital will be increasing. In most cases, when the firm is increasingly being levered, it means that the costs of securing additional debt will be increasing due to increasing risks of default due to too many debts. Therefore, the debt trend of the firm is important. In the case at hand, Walt Disney Debt to equity ratio has low fluctuation although the debt uptake has been slowly increasing in the last three years. In addition, the firm is observed to be using more equity than debt in all the four years in consideration hence more money will be attributable to the shareholders. However, comparing Walt Disney with its closest rival, Walt Disney has a lower debt to equity value. However, Comcast ratio is oscillating around 2 meaning that the firm’s debt uptake is stable compared to Walt Disney whose debt uptake is increasing albeit slowly. As such, the Walt Disney Current debt levels cannot be considered toxic thus they are sustainable based on a comparable peer and the fact that money net profits funds will be attributable to shareholders as opposed to financing debts.
Debt to assets ratio, commonly referred to Debt ratio, is another ratio that shows the firm’s solvency capabilities. The firm gives the proportion of assets that have been financed by debt. In this case, considering the financial statement of the two rival companies, Walt Disney utilizes debt to finance 45% of its assets compared to Comcast which utilizes debt to finance about 60% of its asset. A high degree of this ratio is a sign of increasing leverage in a company. As such, this exposes the firm to high financial risks. Therefore, it follows that Walt Disney has a lower financial risk attributable to leverage since it has a lower debt ratio compared to its main rival Comcast. Also, this level of debt is sustainable based Comcast value and the fact that the firm only finances 45% of assets on debt.
Profitability Ratio
Generating growing revenues does not translate to generating profits. Therefore, one needs to examine the profitability of an organization after it has generated a given amount of revenues. The table below summarizes key profitability ratios of the two firms.
Gross profit margin is the first profitability ratio. The ratio shows the amount that is attributable to the firm after the firm has factored the cost of sales. The margin is useful in understanding the proportion of revenue that is left to cater for other operational costs. Walt Disney gross profit is above 70% for the four years reviewed. As such, it shows that that the cost of sales consumes less than 30% of the revenue generated by the organization. However, the ratio is declining although at a very slow pace showing that the firm’s cost of sales is increasing. Comparing the Walt Disney results to Comcast, the firm has a lower Gross profit margin which is also recording a slow increment. Therefore, Walt Disney is performing better when the rate is considered but poorer than Comcast when the trend is considered. Nonetheless, the gross margin is high enough.
The second profit ratio is Operating profit. Operating profit is useful in assisting the firm in determining the most suitable pricing strategy thus gaining operational efficiency. The ratio is obtained having factored the operational costs that the business will incur in the process of providing the service that it offers. The higher the profit, the better the firm is performing (Fridson & Alvarez, 2011). Considering Walt Disney financial statements, the operational profits margin averages 45% in the four years that are being considered. In addition, the ratio is increasing with time showing the management is improving its efficiency in taming operational costs. The results are compared to Comcast where a similar trend is observed but the value of the margin is lower than Walt Disney’s value.
Net profit margin considers the net profits the firm makes as a percentage of the firm’s revenues. Additional costs are factored into the operational profit in order to arrive at the net profit which measures the residue amount the firm will have. The value will then be subjected to taxation to have the amount attributable to the shareholders. This term is called the net profit margin after tax. However, for this case, the net profit margin before tax is applied where Walt Disney records a superior margin compared to Comcast. As such, Walt Disney is more profitable compared to Comcast despite the latter posting higher revenue. On the other hand, Walt Disney records an improving trend which is gentle while Comcast records mixed net profit margin results in relation to the trend.
Return on asset is another ratio that shows the firm's ability to utilize its assets to generate a return (Fridson & Alvarez, 2011). The higher the return on asset’s value, the higher the firm’s ability to utilize its assets. In this case, Walt Disney has a higher and improving return on asset compared to its closest rival, Comcast. In relation to trend, Comcast shows mixed results thus showing fluctuation efficiency in utilizing its assets, unlike Walt Disney which shows an increasing efficiency in the manner that it utilizes its assets.
Return on equity shows the firm’s ability to employ its capital to generate a return (Fridson & Alvarez, 2011). The higher the ratio, the better the firm employs its capital. In this case, Walt Disney shows an increasing trend in its return on assets in the last three years depicting consistency in its capital employment methodologies while Comcast posts fluctuating results showing that the firm is not consistent in utilizing its capital. In addition, Walt Disney records a higher return than Comcast which shows that Walt Disney has a better capital employment strategy compared to Comcast.
Earnings per share show the amount that each share will claim in the net profit attributable to the shareholders. In both trend and value, Walt Disney shareholders are enjoying higher earnings per share and an increasing trend in earnings per share.
Activity Ratios
Fixed asset turnover shows the management efficiency in utilizing the firm fixed assets. The ratio is preferable since it monitors the long-term utility of the assets. The higher the ratio, the better the firm is utilizing the fixed assets. As such, Walt Disney records a higher fixed asset ratio showing that the firm is utilizing the fixed asset in a better manner than Comcast. Also, the fixed asset efficiency consistency in Comcast shows mixed outcomes over the years while Walt Disney efficiency is improving over time. A similar observation is observed when the working capital turnover is considered.
Market Feeling
Walt Disney has a strong financial outlook judging from the financial statement. However, it is not obvious that the market will capture this strong financial position in the market share pricing. Nonetheless, the financial statement contributes to the market feeling which in turn influences the share prices in the market. The Graph below summarizes the monthly prices for the last 48 months.
The share prices show that from July 2015, on aggregate, the share price has a negative slope meaning that the share price has been falling. Therefore, the investor should hold on the stock since its value is falling in order not to actualize the market value losses. In addition, considering the Accumulation Distribution Line (ADL), it confirms that in the recent months, the share has not been attracting capital into it. As such, this lowers the demand which subsequently leads to a reduction in the share prices. However, using a trend analysis on the Accumulation Distribution Line (ADL), it shows that the firm stock ability to attract additional capital will improve when the historical data is fitted to a 4-degree polynomial to make the prediction. In order to improve on accuracy on when to sell the stock, Moving Average divergence and Convergence (MACD) is used to effectively map when the share price will have peaked in order to optimize on the sale. For now, the investor should Map the lowest point at which the prices are expected to reach using the various tool such as MACD using predicted values and accumulate the share since, in future, the firm's share price will gain creating an opportunity to sell on margin (Taulli, 2004). The position is boosted by the fact that the firm has a strong financial outlook as identified in financial ratio analysis thus it is safe to hold the stock until such a time the investor can optimize on capital gains.
SWOT Analysis
Strengths
Walt Disney Characters forms one of the strongest pillars of the firm strengths. These characters which include Mickey Mouse, Goofy, Donald Duck and Ariel among others forms humorous memories across several generations thus becoming a key revenue generator for the organization. These characters are some of the elements that have created the brand the firm enjoy thus propelling its survival and growth.
Walt Disney is one of the Pioneer cable providers. Therefore, the firm has extensive prowess in cable networks. The firm has received favorable rating among a wide array of cable consumers which has led this business section to be the largest revenue generator for the company.
The firm has managed to have several strategic acquisitions over the years. Notable venture acquisitions include the acquisition of Pixar, Lucas film, and Marvel which not only improves on the firm variety of services but also add additional sources of accelerated revenues (Little, 2013).
The firm has invested heavily in promoting social values. As such, the firm is very critical of the content of the services that it offers hence ensuring that its services can be consumed by all family members irrespective of their age. The ability to stress on ethics and social values have enabled the firm to be a favorite among adults since it offers safe viewing to children.
The firm has maintained a high cash surplus in its financial statements. Due to this fact, the firm has managed to adequately fund its acquisitions over the years without straining its capital structure.
The firm has over the years has managed to diversify its operation through both organic and inorganic processes. As such, this has enabled them to be present in several booming subsectors including retail, media, entertainment and theme parks thus enabling the firm to sustain its revenue generation (Little, 2013).
The firm has managed to maintain favorable pricing regime despite periods of economic turbulences and increased investment such as Shanghai Walt Disney Resort and Avatar Land. As such, this has enabled the firm to maintain good economic relation with the client due to the friendly and stable charges.
Weaknesses
The Interactive segment of the business has been operating in the danger zone due to weakening video games sales and low success in the social network games. Although the management is still optimistic that the segment will peak in the coming years, its low success is a blow to the firm.
The firm has recorded dismal performance in the soft broadcasting segment. The firm has recorded increasing operating costs yet ABC has been receiving an underwhelming rating from its viewership. As such, the increased costs have not translated into increased productivity which leads to increased revenues.
The firm has been experiencing uneven receipt in its box office segment. In the recent times, the firm has experienced discouraging receipt in some of its key productions such as The Lone Ranger and John Carter which had a high budget but did not meet the revenue targets (Hellman, 2013).
In modern day, Walt Disney has not generated new characters whose success can be equated to earlier characters such as Mickey Mouse. Therefore, it shows that the firm has a slow pace of developing new characters and the new characters are not as good as the earlier characters signaling lower creativity and audience captivation.
Opportunities
The firm has not extensively reached out to consumers in the developing countries market such as Africa and Asia. Therefore, in order to increase its revenues, the firm needs to devise a strategy to which it can penetrate this market before the emerging local firm can dominate (Harrington, 2015).
Walt Disney has been primarily focused on children. Although children have a big influence on viewership, the firm has a chance to expand on adult viewership by developing products that specifically target adults and young adults. The firm has taken this initiative by introducing sports but more can still be achieved that targets adult.
Threats
Key competitors such as Time Warner Cable and Comcast have been reducing the prices for cable services paving the way for cut-throat competition. Cable services have been the primary source of income for the company. As such, the firm is compelled to engage in a price war with its competitors.
Localization is another threat to the firm. Other nations, especially middle-income economies in Asia Pacific, are developing businesses that resemble Walt Disney (Bhasin, 2014). As such, due to their local roots, they are likely to have an easier market access thus creating a loyal customer band in their home countries hence limiting Walt Disney from penetrating such markets.
The firm is operating under huge operating costs characterized by high human resource expenses. In the recent past, the increase human resource has not really translated into increased revenue (Bhasin, 2014).
Rapid changes in technology are exposing the Walt Disney to fast mutating threat. Products such as Netflix have brought a new platform which threatens the firm's prospects unless the firm has the abilities to adapt effectively. As such, the firm needs to keep track of technology as well as its content and business in order to remain competitive. Moreover, technologically based crimes distort the firm' revenue generation due to the ability to access the firm products illegally through piracy.
Recommendation to Walt Disney Co Problems
The firm does not have an alternative but to spread its operation to the developing countries. In doing so, the firm will be tapping into this high potential markets hence it will have the ability to create localized brands in these developing countries thus extending its brand, though in a differentiated form, in order to localize Walt Disney in these countries.
Walt Disney has established a reputation for developing quality content and offering superior services in the industry. However, in the current day and age, alternate media has become widespread thus creating intensive competition. As such, Walt Disney needs to appreciate the firm has to change the business approach and incorporate recent trends in its business model in order to compete with these alternative media that are competing with the firm from non-traditional platforms such as Netflix.
The firm is involved in a cutthroat competition especially in pricing. Although prices are a huge factor since the price is one of the four Ps in marketing, it is paramount to understand that competition solely on prices may not be effective. As such, the firm will need to re-engineer its 4Ps in order to compete on a wider platform as opposed to just responding to price threats from the competition.
In the recent past, the firm has experienced uneven reception of some of its box office products. This has been attributed to ineffective campaign strategy. As such, the firm needs to identify the specific reasons why these mishaps are arising since when they arise, the firm is incurring huge losses. The action will enable the firm to be consistent in its marketing campaign thus lowering chances of uneven reception of box office products.
Over the years, competition has been mounting in all the business segment Walt Disney is present. Although Walt Disney is among the market leaders in its operational areas, the firm should be keen in flexing its financial muscle and make strategic acquisitions in order to keep increasing its market share. The firm will also have increased its financial revenues.
The firm has not been sufficiently proactive in developing new characters that are as successful as its earlier characters. As such, the firm must reinvent its creative aspects in order to come up with popular and entertaining characters that will captive each generation growing up at a particular time. The renewed creativity will lead to increased revenue generations.
Just like any other industry, diversification should remain one of the aspects that Walt Disney must always consider. The firm should always be on the lookout for new business segments to enter in order to spread its sources of revenue. As such, this promotes the firm's initiative in risk management.
References
Investor Relations - Stock Information, Events, Reports, Financial Information, Shareholder Information - The Walt Disney Company. (n.d.). Retrieved June 23, 2016, from https://thewaltWalt Disneycompany.com/investor-relations/
Bhasin, H. (2014, January 12). SWOT of Walt Disney - Internal analysis of Walt Disney. Retrieved June 23, 2016, from http://www.marketing91.com/swot-walt-Walt Disney/
Drake, P. P., & Fabozzi, F. J. (2012). Analysis of financial statements. John Wiley & Sons.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioner's guide. Hoboken, NJ: Wiley.
Harrington, R. (2015). SWOT Analysis: Walt Disney Co. Retrieved June 22, 2016, from http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__Walt_Walt Disney_Co_.aspx#.V2quW_l97IX
Hellman, J. (2013, October 01). The Walt Disney Company: A Short SWOT Analysis. Retrieved June 23, 2016, from http://www.valueline.com/Stocks/Highlights/The_Walt_Walt Disney_Company__A_Short_SWOT_Analysis.aspx#.V2quW_l97IX
Little, I. (2013, October 29). SWOT & Analysis of The Walt Disney Company. Retrieved July 2016, from http://www.evankropp.com/wp-content/uploads/2013/10/SWOT_Anlaysis_Walt Disney-2.pdf
Taulli, T. (2004). What Is Short Selling? (Illustrated ed.). McGraw-Hill Professional.
Tobin, Z. (2016, January 11). Walt Disney SWOT Analysis: Walt Disney Algorithmic Evolution For 2016. Retrieved June 22, 2016, from http://iknowfirst.com/Walt Disney-swot-analysis-Walt Disney-algorithmic-evolution-for-2016
