Project 2. Disney Comparison Analysis

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1 Disney Comparison Analysis Harriet Creyer Project Two: Disney Comparison Analysis Southern New Hampshire University FIN 320 Principles of Finance

2 Disney Comparison Analysis Disney Disney is known around the global for their movies, theme parks and TV shows. Disney has been creating beloved childhood memories that have evolved into adulthood for the past 98 years. During this paper I will be comparing the current financial position, Q3 of 2022 dated 2 nd July 2022 and Q3 of 2021 dates 3 rd July 2021. I will be using the information obtained to help make decisions to either help improve or maintain the financial health of their business. To do this we will be taking a look through the Balance Sheet, Income Statement and Cash Flow statement and reviewing 10 financial ratios to make a quick informed decision. Fiscal Quarter Comparisons and Comparison Analysis Fig. 1

3 Disney Comparison Analysis Fig. 2 Above in Fig. 1 it shows the financial rations of 3 rd quarter of 2022, and in Fig. 2 it shows the 3 rd quarter of 2021 A. Working capital – In 2021 the working capital of the was $6.55b and in 2022 It decreased to 718m, this measures the current availability of assets to pay off short-term obligations. B. Current ratio – in 2021 the Current ratio was 1.24 and in 2022 it reduced to 1.02, this measures the current liquidity of the assets and gives us a quick view into the financial health of the company. C. Debt ratio – in Q3 of 2021 the ration was sitting at 0.55 and in Q3 of 2022 it had reduced to 0.53 – this shows the current debt to assets. Having the decrease in the det ratio shows that debt has been paid off within the year. D. Earnings per share – in 2021 this was sitting at 0.62 and in 2022 it increased to 0.84, it shows us that during the end of 2021 and the first 3 quarters of 2022 the profitability of the company increased.

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4 Disney Comparison Analysis E. Price/earnings ratio – in 2021 the price/earnings ratio sat at $285.45 and in 2022 it decreased to $98.02with the remnants from the global pandemic it is taking longer for companies to adjust and get back to the ‘norm’ that was before 2020. F. Total asset turnover ratio – in 2021 the asset turnover ratio was sitting at 0.08 and in 2022 it has increased to 0.11, this tell us that they their asset turnover for movies/products etc. is improving. G. Financial leverage – in 2021 the financial leverage was 2.33 and in 2022 it was reduced slightly to 2.21, this shows us how Disney is capable of meeting their financial obligations in relation to their Assets and Shareholders Equity. H. Net profit margin – With an exceptionally low net income for Q3 of 2021 the Net Profit Margin sit s at 0.07in 2022 we did see no change in 2022 sitting at 0.07. I. Return on assets – in 2021 we saw a return on assets ratio of 0.01 and in 2022 we saw an no change 0.01, this measures the profitability of a company in relation to its assets. J. Return on equity - in 2021 we can see a return on equity ratio of 0.01 and in 2022 we saw an increase to 0.02, this shows the company’s net income in relation to the shareholders equity. Financing I think Disney suffered from the global pandemic in 2020, having a lot of their income from their theme parks their financial health took a hit. I think they have a long way to go before they can say they are in optimal financial health however they are having been slowly improving since 2020. With the addition of Disney+ during the 2020 pandemic it

5 Disney Comparison Analysis allowed them to take some sort of control of their income within a company that was previously customer facing. Short-Term Financing To enhance their overall liquidity, Disney would benefit from short-term financing. The increase in investments would allow to get the working capital, current ratio, and the profit margin back into a healthier standing. With many high-profile ventures in the pipeline for the up-and-coming years there will be a small influx of income however I the sort-term financing will set them into a better path. Short-term financing would help generate the cash required to keep the company healthy and even out their cash flows; however, it would also increase the liabilities of the company. Bond Investment Bonds can be a good way to invest funds to allow for assets to gain interest, corporate bonds are a great way to ensure some returns on their current assets. Some bonds that currently trade allow investors to buy and sell the securities, this allows them to trade bonds in if financially needed. Interest rates while can be higher do have some risks with them, the coupon rate on bonds indicates the percentage of the par value of the bond. While Bonds do allow for a steady income with some allowing access if required, there are also some risks involved with bonds. One major risk involved with corporate bonds, is that the bond issuer could potentially default on payments before the maturity date has been reached. Interest rates are linked to inflation or the market values when this fall then the interest rate on the bond could potentially fall. There is no reward without risk when it comes to bonds, if you are needing/wanting a higher return on your investment then there needs to be a higher level of risk involved.

6 Disney Comparison Analysis Capital Equipment Capital equipment are items purchased to assist with the current operations, or to help with future projects. There are some risks and benefits to going down the route of capital equipment, one major one risk is that they can potentially incur large cash expenses or even boost debt balances. While Disney have previously seen great success when going down the capital equipment route it does pose risks. Depending on the life span of the equipment and the approximate annual maintainecosts also need to be taken into consideration. Building Buying buildings can have its risks and benefits, it can take a lot longer to see the financial gains for the buildings and there are higher financial obligations when it comes to the buildings. However one benefit of buying into buildings is that some of the costs can be fixed. The current and recent market for real-estate is not in favour of buying properties, with the unstable and unrealiable market the growth potential wouldn’t be wise until inflation stabilises. Ethical Investing Something for Disney to consider would be the ethical implications when investing in any market. Ethical investing is the “ practice of using one’s ethical principles as the primary filter for the selection of securities investing…Ethical investing is the practice of selecting investments based on ethical or moral principles…Selecting investments based on ethics offers no guarantee of performance. ” (Kenton). Investors into more ethical investment opportunities tend to avoid companies/investments involved in gambling, alcohol, smoking, or firearms. Environmental, Social and Governance (ESG) investing is a set of standards in

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7 Disney Comparison Analysis which a socially conscious investor can use. They are able “screen investments based on corporate policies and to encourage companies to act responsibly” (Team, 2022). Financial Evaluations Bond Investments Regarding the financial evaluation of Disney there are several things they need to take into consideration before proceeding with any investments or future projects. They need to do thorough risk assessments to ensure that they are moving forward in the correct manner. At present the bond investment option would be a good starting point for Disney, it would allow for a monthly income from the interest, however the bond offered from the Chinese business wouldn’t be a very good idea. Financially this would be a great bond to utilise, however due to the questionable use of child labour previously used within the country this would cross the ethical guidelines and standards. Presently being unable to validate the claims about no longer using child labour it would be in the best interest of Disney to decline this loan offer. Calculating the NPV of the bond offered by the U.S. business resulted in a negative value of - $1,925,297 as shown in Fig. 3. The discounted rate of return is currently sitting at 9% with the investments in there for 10-years and the negative NPV; Disney should avoid this investment and not proceed any further. Fig. 3 Capital Equipment

8 Disney Comparison Analysis The capital equipment investment would present its risks due to the continuous need for equipment to be updated; items like machinery, and vehicles; need regular maintenance, they break down potentially causing production delays and loss of income, and they depreciate over time. While investing in capital equipment can have a significant impact within the financial statements, they require a considerable portion of the current cash balance, and they could potentially increase the liabilities with the depreciation or the investments themselves; thus, having a knock-on effect to the cash flows and the debt ratios previous discussed. As for the investment of the $25m in equipment Disney is potentially looking into, I think it would be a good investment choice for Disney. The current NPV as shown in Fig. 4 is $2,243,458m, which is a positive result for their current investment options. With the annual generate cash flow to be $4million it will be a good income investment over its 15-yr useful life. With Parks and Disney becoming fully operational within the last 12 months due to the pandemic it makes sense to update some equipment and start producing an increase in cash flows. Fig. 4 Building The last investment option for Disney is the $10m to purchase a building. At the current time with the position financially that Disney is in I do not think that it is a good idea to invest in the building, not only will they have the $10m for the building itself they need to ensure that they prepared to meet the current LEED standards. There will be significant financial expenses to remove the inactive gas station tank that the previous owner failed to

9 Disney Comparison Analysis remove. The Leadership in Energy and Environmental Design (LEED) is a globally recgonised certification program that aid in the design, construction, and operation of green buildings. This as well and the ESG there are a lot of third-party factors involved within this purchase. When calculating the NPV for this investment it resulted in a NPV of $864,920 as shown in Fig. 5. The initial investment would be the $10m over a 20year life span of the building, with an interest rate of 10%. The salvage value of the building would be $1.5m, and their annual cash flow income from the building would be $1.25m. These results are very low for what the initial investment would needed. Fig. 5 Future Financial Considerations I think if the global pandemic hadn’t of hit their customer facing business I think Disney would be in a completely different position financially. I think if they continue in the trend that they are currently showing then they will be able be in a better financial health position. With their current ration sitting at 1.02 it is a very good position; this allows us to see that what they have been doing over the past 2 years has had an impact. Even with the decrease from 2021 to 2022 they are currently sitting with more assets that liabilities which is the best scenario for Disney at present. Disney introduced Disney+, and once the parks fully opened up again the celebrated their 50 th Birthday it was able to attract the people back to the parks. This had a significant impact on their financial health. Disney currently has a financial leverage of 2.21, this again has shown a decrease from the 2.33 shown in 2021, ideally the financial leverage ratio would like to be round the 3 mark, if they keep declining then they

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10 Disney Comparison Analysis are going to find themselves losing the trust of their investors. At present I think it is difficult to give a full breakdown of the financial health of Disney until they have reopened for a longer period of time and get back to the Disney we all know and love. The current Return on Assets (ROA) is at a concerning rate currently 0.01 as well as the Return of Equity (ROE) at 0.02, both of these ratios show the shareholders the ability of the return on their investments. As mentioned previously I think they would need to consider short-term financing to allow themselves a healthier start to 2023.

11 Disney Comparison Analysis References Journal, W. S. (2022). Dis | Walt Disney Co.. annual income statement - WSJ . The Wall Street Journal. Retrieved October 2, 2022, from https://www.wsj.com/market-data/quotes/DIS/financials/annual/income-statement Kenton, W. (2022, July 8). Ethical investing definition . Investopedia. Retrieved October 14, 2022, from https://www.investopedia.com/terms/e/ethical-investing.asp Green building 101: What is LEED? U.S. Green Building Council. (n.d.). Retrieved October 14, 2022, from https://www.usgbc.org/articles/green-building-101-what-leed Market activity close market activity stocks options funds + etfs indexes commodities cryptocurrency currencies futures fixed income global markets quick links real-time quotes after-hours quotes pre-market quotes NASDAQ-100 symbol Screener Online Brokers Glossary Sustainable Bond Network Symbol Change History IPO Performance Ownership Search Dividend History investing lists market events economic calendar earnings IPO calendar dividend calendar spo calendar holiday calendar analyst activity analyst recommendations daily earnings surprise forecast changes commodities gold copper crude oil natural gas nasdaq data statistical milestones total returns daily market statistics most active see all market activity . Nasdaq. (n.d.). Retrieved October 4, 2022, from https://www.nasdaq.com/market-activity/stocks/dis/historical Team, T. I. (2022, September 27). What is environmental, social, and governance (ESG) investing? Investopedia. Retrieved October 14, 2022, from https://www.investopedia.com/terms/e/environmental-social-and-governance-esg- criteria.asp The Walt Disney Company. (2020, March 16). Retrieved October 1, 2022, from https://thewaltdisneycompany.com/ Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial Management: Principles and Applications (13th ed.). Pearson Education (US). https://mbsdirect.vitalsource.com/books/9780134418001

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