Question

Case Study Notes

21,922 36.5% 46.7% 24,701 41.1% 6,095 38.8% PECP Studio Entertainment 10,065 16.7% 19.1% 3,414 5.7% -738 -4.7% -668 -10 Eliminations Total 59,434 HOW DISNEY MAKES MONEY PARKS, EXPERIENCES & CONSUMER PRODUCTS A previous Disney Case used the company's financial statements Parks, Experiences & Consumer Products revenue includes to determine how Disney makes money. A few pertinent points ticket sales to Disney theme parks and cruises, merchandise sold have been summarized here as they relate to this Disney Case. at The Disney Store retail locations, and more. The segment's Disney has four operating segments--Media Networks, Parks, revenues have been on a general upward trend. It seems rea- Experiences & Consumer Products, Studio Entertainment, and sonable that this segment is subject to the success of the other Direct-to-Consumer & International. The table below shows the three segments, with the Studio Entertainment segment's suc- proportion of Disney's total revenues and operating income that cess having the greatest imapct. Data shows that popular charac come from each segment. ter movies, like Finding Nemo, significantly increase purchases of products related to the film. Disney also centers most of its Disney Segment Revenues and Operating Income new theme park and experience entertainment on recent movie AN Data from Fiscal Year 2018 in Millions, Except Percentages success like the Star Wars park in Disneyworld. In your analy- Revenues % of Total Operating Income % of Total sis, consider the changes in operating margins in this sector. Media Networks 7,338 MEDIA NETWORKS 3.004 The company owns and operates a number of media networks, DCTI including ESPN, Disney, and ABC. With the advent of Netflix, Hulu, and Amazon Prime, consumers have completely changed how they view and consume media content. Using ratios like 15,689 operating margin and asset turnover, think about how you Source: The Walt Disney Company Annual Report (10-K) believe Disney may be able to compete in this changing market. A NOTE ON RATIOS AND COMPARISONS STUDIO ENTERTAINMENT During routine medical examinations, patients often have their This is the company's movie making business. Movie making is blood drawn and tested. Blood test results are displayed in a often considered an "eat what you kill" business. This means table of numbers. Each number is a ratio that specifies how that movie makers are judged on the value of their current cre- much of a particular substance was found in a particular mea-ation. A number of trends in this segment significantly impact sured volume of blood. In isolation the results are not partic- the company as a whole. Revenue growth is spotty with notice ularly useful. To make better use of the data, test results are able periods of up and down. Assets have increased through compared to data from other similar healthy individuals as a three purchases of competitive studios: Pixar, Marvel, and Lucas reference and benchmark. Films. For this segment, focus on three things: the number of Financial ratios act like a blood test for a company. They films produced, the operating margin, and the average reve- often give analysts advance notice of operating or financial dan nue per film. gers being experienced by companies when compared against their healthy peers. But what exactly constitutes a peer. DIRECT-TO-CONSUMER & INTERNATIONAL Disney has four discrete operating segments. No other com- The Direct-to-Consumer & International segment includes busi- pany in the world has a similar structure. Consequently, we nesses like ESPN+, Disney+, and Hulu streaming services. These are not likely to find a strict comparable company to serve as businesses generate revenue from subscription fees charged to a benchmark for ratio comparison. Very few companies have customers/subscribers for Disney's DTC streaming services. For peers that are strictly similar. this segement, focus on programming and production costs, as well as technical support costs. CASE CLUES The four case questions are tied to particular ratio segments and can be answered by limited assessment of Disney's ratios. The following clues may be useful in answering the final case question. The Walt Disney Company has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-Consumer & International. Each of these segments operates within different environments.

Case Questions

1- Is Disney liquid compared to its peers?

2- Does Disney manage its assets effectively compared to its peers?

3- Does Disney’s debt load suggest trouble paying its creditors?

4- Compare Disney’s profitability to its peers.

Answer 1

1 - Compared to its peers Disney seem to be short on cash or other liquid assets as it Quick & Current ratio is one of the lowest in the industry. Also, from a standalone perspective it's current ratio has been depreciating as depicted in the trend analysis table. It might face difficulty to pay it's near term & working capital obligation if the assets which can be quickly converted into cash or cash equivalent keep on depleting like this.

Current Ratio = Current Assets/Current Liabilities

i.e., sometimes termed as working capital ratio, this suggests the company's ability to serve it's close or near term debt obligation to run the business efficiently.

However, a lower Days Sales Outstanding number signifies the company is able to collect it's accounts receivable better than it's peers, which can help with its cash flow problems.

2 - Asset Turnover Ratio (ATR) = Total Revenue/Average Assets

This ratio tells us the usage of assets by the company in a similar industry effectively. Comparing Disney's ATR to its peers it doesn't seem to be quite healthy, and one of the lowest in the industry. Which implies, Disney is making less revenue per dollar of assets, it's not been able to churn the assets properly in order to generate the revenue compared to its peers.

3 - Disney's debt load is reasonable as per the industry standard, as shown by its Debt to Market & Debt to Equity ratio. It is one of the lowest that means comapny is at low risk from the perspective of leverage used in its capital structure.

Also, the interest coverage or times-interest-earned ratio is very healthy for Disney, when compared to its peers which signifies the firm is better placed when compared to its peers in order to pay the interest on outstanding debt.

4. Profitablity as shown by gross margin, operating margin & net margin ratio seems to be average as per the industry standard, also the PE Ratio has gone down significantly during the past years, which tells that it's getting difficult for the company to keep the earnings high as compared to the market price.