The Walt Disney Company is an American multinational company with headquarters in California with diversified business interests in the entertainment industry, especially in theme parks, movies, resorts, tv programmers, games, music. It is the leading company in home entertainment in the 20 th and 21 st century with more than $50billion in revenues in the last three years. Conducting ratio analysis on the Walt Disney company's financial statements helps understand its financial strengths and weaknesses, which the management could use to build and strengthen its position in the market (Gibson, 2013) . The analysis covers the first quarter,2021, and compares the results with an equivalent period in 2020.
Working capital ratio
The company recorded a negative working capital of $7021millionin in quarter 1,2020 compared to a positive of $8328million in 2021. Negative working capital is an indication that the company had liquidity challenges, a declining operational efficiency, and a deteriorating short-term financial health (Gibson, 2013); as the company became cash strapped in the quarter, the current liabilities accumulated eventually out-passing the current assets. The company ran out of cash, as shown by the low level of cash and cash equivalent of $6833, which was not adequate to cover the daily operational needs and pay short-term debts. However, prudent management of the liabilities and assets in the first quarter of 2021 reversed the position as shown by the increase in cash and cash equivalent of $17068, which is more than three times a year earlier. The current liabilities declined by $8251million.
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Current ratio
Warner's current ratio for Q1 2020 of below one at 0.8 follows a similar working capital trend. The ratio implies that the company experienced financial distress with difficulties in meeting short-term obligations that fell due in the quarter (Gibson, 2013) . The position is attributed to the growing accounts payable and current borrowings, and at the same time, the liquid assets are declining. The indicators portray the effects of operational inefficiencies and their impact on the financial health of a company. On the other hand, the current ratio for Q1,2021 is 1.3, which shows a sharp improvement in the management of current assets and liabilities. The company's liquidity position has improved, and the company has sufficient financial resources to pay its short-term bills.
Debt ratio
The debt ratio for the two quarters is below one, implying that the company's assets exceed liabilities and can use the assets as security and sell them to meet the situation's debt obligations. However, the ratio has grown from 0.19 in 2020 to 0.26 due to the additional debt taken in the last twelve months. The borrowings have grown by 40%, while other long-term liabilities have expanded by 8% as the firm needed more funds to close liquidity gaps that had widened in early 2020.
Earnings per share
The ratio has drastically declined from 1.19per share in 2020 to 0.0099 in 2021 as the level of earnings deteriorated (Mergentonline.com, 2021) . Walt Disney's net income dipped by 99% to $18million in 2021 from $2147million reported in the previous period, mainly as a result of depressed total revenues in the first quarter of 2021, which the company has accredited to the economic situation precipitated by the Covid-19 pandemic which has resulted to the closure of amusement parks and movie theatres.
Price /earnings ratio
A decline in earnings per share has resulted in a drop in Walt Disney's price/earnings ratio from 122.88 in 2020 to negative 69 in 2021 (Mergentonline.com, 2021) . The decrease in earnings and net income are the major causes of the negative price-earnings ratio.
Total assets turnover
The ratio has also declined to 0.08 in 2021 compared to 0.42 in 2020, implying a declined efficiency in utilizing assets to generate higher revenues. Assets' productivity was constrained in the first quarter of 2021 due to the closure of businesses necessitated by the ongoing pandemic.
Financial Leverage ratio
An observation of the ratio shows a marginal rise in the ratio from 2.12 in 2020 to 2.28 in 2021 as the company's leverage levels increased. The increased ratio shows that an increasing proportion of the company's assets are financed by debt.
Net profit margin
The ratio slowed down drastically from 10% in 2020 to zero in 2021 due to the decline in the sales revenue, which was not proportionate to the decline in operating expenses. Thus, most of the revenue was used to cover the expenses with little balance as net income.
Return on assets and return on equity
The ratio declined tremendously, from 4.29 in 2020 to less than 1 in 2021, due to the depressed level of earnings (Mergentonline.com, 2021) . Return on equity too decreased from 9.46 in 2020 to zero in 2021 due to the depressed earnings.
The results show a decline in Walt Disney company's financial health. All the critical ratios of liquidity, profitability, and leverage showed a company struggling with liquidity issues and declining sales revenue. This leads to low profitability and rising leverage levels, which could pose a significant credit risk if appropriate remedial actions are not taken. A critical determinant of the company's success is sales revenue, which has to be sufficient to cater to the operating costs and service the rising debts. Also critical is the firm's management, who has to exercise prudence in managing cashflows from operations and debt, ensuring optimum efficiency in deploying the company assets to maximize productivity, generate more revenue, and keep the firm afloat.
Disney has used short-term borrowings to boost its liquidity levels amidst declining revenues, helping the firm maintain sufficient cash flows to finance operations. The financial results for Q1,2021 show an increase of 40% in borrowings as an indication of increased appetite for debt to close the gaps in cash flows caused by the decline in sales revenue.
The contribution of Covid-19 in the financial results of quarter 1,2021 is significant, and it has been a usual period for businesses. Therefore, the comparison of the two quarters is not on a level playing field.
References
Disney (Walt) Co. Www-mergentonline-com.ezproxy.snhu.edu. (2021).
https://www-mergentonline-com.ezproxy.snhu.edu/companyfinancials.php?pagetype=asreported&compnumber=2488&period=Quarters&dataarea=BS&range=3¤cy=AsRep&scale=AsRep&Submit=Refresh&csrf_token_mol=4ecff8ccfd .
Gibson, C. (2013). Financial Reporting & Analysis (13th ed.). South-Western.
