Industry Factor
The Media and Entertainment (M&E) industry is made up of organizations that possess content and license intellectual property and distribute media via television and film. The M&E industry is composed of multiple segments, which include films, prints, radios, and televisions. A number of companies or organizations operate in this industry. Prime examples include Walt Disney Company, Time Warner Inc., and CBS Corporation. To maintain a competitive advantage in the industry, companies are compelled to continually adapt to customers’ tastes in both content and distribution (Yang, 2019). There has been a significant shift in recent years, with many consumers transitioning from cable programming to over-the-top streaming services.
The M&E industry contributes significantly to the US economy. According to a 2020 article published by Media and Entertainment, the M&E industry contributes more than $41 billion every year to the US economy. The movie and video production industry, which incorporates operators producing and distributing motion pictures and videos, has grown moderately over the past five years. The disruption of the traditional distribution channels remains the primary challenge facing the industry. The high ticket prices, in addition to the decreased attendance, have resulted in a decrease in sales. Between 2015 and 2020, the industry has maintained an average growth of 1% (“Media and Entertainment”, 2020). In an attempt to increase its performance, the industry’s business model has shifted, with studios prioritizing blockbusters and increasingly depending on the foreign distribution. Moreover, the increased competition among the major participants in the industry has resulted in a series of high-profile acquisitions and bidding wars for creative properties.
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Throughout history, Walt Disney Company has excelled in the media entertainment industry. The organization has maintained a top position in the industry. This can be attributed to a number of factors, including customer loyalty and its strong brand recognition. Walt Disney continues to have a competitive edge in the market because of its unique media content as well as because of its popular parks and resorts. In addition, the company has a consistent ability to monetize its intellectual property. Moreover, the organization is also adapting to the changing times by investing in BAMTech and other OTT streaming services that will aid the company to broaden its distribution and remain competitive in the industry.
Financial Analysis
The categories of financial ratios that will be applied to gauge Walt Disney’s effectiveness in the entertainment media industry are profitability, liquidity, leverage, and activity ratios. The profitability ratios include the “gross profit margin, operating profit margin, net profit margin, return on total assets, and return on stockholder’s equity”. The gross profit margin will show the percentage of revenues available to carter for the operating expenses and yield a profit (Palepu et al., 2020). On the other hand, the operating profit margin, which is also known as the return on sales, will be used to show Walt Disney’s profitability of current operation without the consideration of interest charges and income taxes. The net profit margin will show the after-tax profits per dollar of sales. The total return on assets and the return on stockholders’ equity will measure the return on total investment in the enterprise and earnings on the company’s capital investment, respectively. The liquidity ratio will incorporate the current ratio and working capital. While the working capital measures the cash available for the organization’s day-to-day activities, the current ratio measures the organization’s ability to meet its short-term obligations (Palepu et al., 2020). The leverage ratios that will be applicable in the financial analysis of Walt Disney include the debt to assets ratio and the long-term debt to capital ratio. Debt to asset ratio will measure the extent to which Walt Disney’s operations have been financed by borrowed funds. On the other hand, the long-term debt-to-capital ratio will measure the organization’s creditworthiness and its balance sheet strength. In other words, the debt-to-capital ratio will measure the organization’s reliance on long-term lenders and stockholders. Finally, the activity ratios, which will include the inventory turnover ratio and the average collection period, will be used to measure the efficiency of Walt Disney in leveraging its assets to generate income.
The aforementioned financial ratios will help in the evaluation of the internal effectiveness of the organization in generating wealth, as well as its current position in the industry, in terms of its competitiveness. The financial analysis will be based on Walt Disney’s financial data from 2017-2019.
Profitability Analysis
| Profitability | 2017 | 2018 | 2019 |
| Gross Profit Margin | 45.0% | 44.9% | 39.6% |
| Operating Profit Margin | 25.2% | 25.0% | 17.0% |
| Net Profit Margin | 16.3% | 21.2% | 15.9% |
| Total Return on Assets | 9.5% | 12.9% | 5.8% |
| Return on Stockholders’ Equity | 21.7% | 25.8% | 12.4% |
According to the profitability analysis, Walt Disney has had a mixed performance over the last three fiscal years. There has being a significant decrease in the gross profit margin for the period between 2017 and 2019 (“Yahoo is now a part of Verizon Media”, 2020). This is to suggest that the percentage of revenue available to cater for the operating profit and yield a profit has reduced. The operating profit margin also decreased from 25.2% to 17% between the same period, suggesting that the company’s profit after the deduction of the variable cost of production has reduced. Be that as it may, the current operating profit is still above the recommended threshold, meaning that the organization is still not exposed to higher risks. The total return on asset ratio is used to measure the effectiveness of the company in earning income from its investment on assets. A higher ratio shows that the organization is in a good position since it shows that the organization is optimizing its assets to generate income (Yang, 2019). In the case of Walt Disney, the total return on assets ratio increased between 2017 and 2018 but decreased in the subsequent year. A similar trend was witnessed with the return on stockholder’s equity ratio. The return on stockholder’s equity showcases an organization’s efficiency in converting investor money into income, suggesting that Walt Disney is inconsistent in its effectiveness in converting investor money into income, following the deep drop in the ratio from 25.8% to 12.4% between 2018 and 2019.
Liquidity Analysis
| Liquidity | 2017 | 2018 | 2019 |
| Current Ratio | 0.81 | 0.94 | 0.90 |
| Working Capital | $ (3,706,000) | $ (1,035,000) | $ (3,217,000) |
The Liquidity analysis helps to gauge Walt Disney’s ability to meet its short-term obligations without raising any external capital. The current ratio is a vital financial metric for determining the organization’s ability to pay back its short-term liability. According to the analysis, Walt Disney’s current ratio for the 2017-2019 fiscal years ranges between 0.81 and 0.94. Aside from the absence of an obvious upward trend, the current ratios are all below one, and thus raising the question as to whether the company has the potential to meet its short-term obligations. Moreover, the organization’s working capital for the same period is all negative and thus suggesting that Walt Disney does not have adequate internal funds to pay its current liabilities or finance inventory expansion (Palepu et al., 2020). The company might be forced to borrow or raise more equity capital to meet its daily operational expenses. Based on the current ratios and the working capital from the analysis, the organization’s financial health is in jeopardy.
Leverage Analysis
| Leverage | 2017 | 2018 | 2019 |
| Total debt-to-asset ratio | 26.4% | 21.2% | 24.2% |
| Long-term debt-to-capital ratio | 32.7% | 25.9% | 30.0% |
Ideally, the greater the debt ratio, the more financial risk an organization faces. A high debt-to-asset ratio indicates the overuse of debts and a greater risk of bankruptcy. However, a debt ratio below 100% shows that an organization has more assets compared to its debts (Palepu et al., 2020; Yang, 2019). In the case of Walt Disney, the total debt-to-asset ratio for the three fiscal years ranges between 21.2% and 26.4%, showing a healthy balance between its debts and assets. The healthy balance between debt and assets puts Walt Disney in a suitable position, particularly when sourcing for overdrafts. On the other hand, the long-term debt-to-capital ratio gauges the organization’s creditworthiness and its balance sheet strength. It showcases the extent to which the organization’s capital investment has been funded by long-term lenders and stockholders. In the case of Walt Disney, the long-term debt-to-capital ratio ranged between 25.9% and 32.7% for the three fiscal years. Ideally, the recommended long-term debt-to-capital ratio is any value below 25%. Although the above values have exceeded 25%, they have not reached 50%, which is a threshold beyond which the organization would be deemed to be relying excessively on long-term borrowing or to be having low creditworthiness and a weak balance sheet strength.
Activity Analysis
| Activity Ratios | 2017 | 2018 | 2019 |
| Inventory Turnover | 31.96 times | 30.19 times | 19.85 times |
| Average Collection Period | 57 | 57 | 81 |
The activity analysis indicates Walt Disney’s effectiveness in managing its inventory and account receivables. Based on the analysis, the inventory turnover has been decreasing between 2017 and 2019. The inventory turnover measures the organization’s operational efficiency in managing its assets. Ideally, an inventory turnover should range between 5 and 6 (Palepu et al., 2020). Therefore, although the inventory turnover ratio has decreased from 31.96 to 19.85 times, the values are way above 6, meaning the company is still efficient. On the other hand, the average collection period represents the number of days it takes for credit sales to be collected from customers. The collection period increased from 57 to 81 in 2019, meaning that the collection performance and credit sales management of Walt Disney decreased.
Based on the financial analysis above, the organization’s profitability has decreased over the last three fiscal years. Aside from the decrease in the gross profit and operating profit margins, the effectiveness of the organization in converting investor money into income has been inconsistent. Therefore, the organization’s market performance has been low compared to previous years. The liquidity analysis raises questions as to whether the organization is in a position to meet its short-term obligations. Aside from having a current ratio that is below one, Walt Disney’s working capital is negative, suggesting that the current liabilities are higher than the current assets. Despite the low profitability level and the risk of failing to meet its short-term obligations, the company has a healthy balance between its debts and assets, as is evident in the leverage analysis. The organization does not heavily rely on debts and thus a lower risk of bankruptcy. Besides, the long-term debt-to-capital ratio indicates that the organization does not overly rely on long-term borrowing- it has a high balance sheet strength. The activity ratios indicate a decrease in the effectiveness of the organization in managing its inventory and account receivable. In general, the current financial position of Walt Disney, when compared with previous years, shows a decrease in performance. The negative trend could be attributed to the loss of subscribership as a result of the growing preference for streaming services among consumers. Other factors that could have contributed to the trend include the increased competition in the industry and difficulties in maintaining intellectual property rights.
Competitors’ Financial Analysis
Walt Disney’s primary competitors include Times Warner Inc. and CBS Corporation. Time Warner Inc. is an American multinational mass media company that operates in almost everything related to mass media. The organization is involved in movie production, publishing, music, theme parks, and cable television, among others. With three primary divisions, namely Turner, Home Box Office (HBO), and Warner Bros, the organization is Walt Disney’s fierce competitor. On the other hand, CBS Corporation is another key performer in the entertainment media industry. CBS Corporation operates as a mass media company that operates in multiple fields, including entertainment, cable networks, publishing, and local broadcasting. The entertainment segment, which consists of CBS Television Network, CBS Studios International, CBS Films, CBS Television Studios, CBS Television Distribution, and CBS Interactive, is Walt Disney’s primary challenger.
|
Major Competitors |
Total revenue (in billions) |
|
Walt Disney |
$ 69.57 |
|
Time Warner, Inc. |
$ 33.5 |
|
CBS Corporation |
$ 27.25 |
In summary, Walt Disney is one of the major competitors in the entertainment media industry. However, based on the financial analysis of the last three financial years, starting in 2017 and ending in 2019, the organization’s market performance has decreased significantly. The relatively poor performance of the organization is attributed to both internal and external factors. Based on the liquidity, leverage, and activity ratios, the management of short-term debts, long-term debts, and the general operation of the organization has not been as effective. On the other hand, factors including the increasing competition along with the coming of streaming services have led to reduced revenue. Nonetheless, Walt Disney, when compared to its main competitors, namely Time Warner Inc. and CBS Corporation, has a competitive advantage, particularly the production of unique contents that cannot be licensed or distributed by other media outlets, and thus putting it in a suitable position to maintain good market performance. Be that as it may, the organization needs to venture into streaming services to avoid the risk of losing revenue to its competitors.
References
Media and Entertainment|Vault.com. (2020). Retrieved 5 December 2020, from https://www.vault.com/industries-professions/industries/media-and-entertainment
Palepu, K. G., Healy, P. M., Wright, S., Bradbury, M., & Coulton, J. (2020). Business analysis and valuation: Using financial statements . Cengage AU.
Yang, J. (2019, August). Analysis of Business Operation Management under the Harvard Analytical Framework: A Case Study of the Walt Disney Company. In 1st International Symposium on Economic Development and Management Innovation (EDMI 2019) . Atlantis Press.
Yahoo is now a part of Verizon Media. (2020). Yahoo Finance . https://finance.yahoo.com/quote/DIS/balance-sheet?p=DIS
