Balance Sheet Changes and Company Strategy
Walt Disney is a diversified entertainment company with a global reach operating two segments including digital media distribution and parks. According to its latest SEC 10-K Form, the company employs 190,000 with 80 percent being full-time employees, 5 being seasonal staff and 15 percent being temporary workers (SEC, 2021). With the emergence of streaming as the main mode through which most Americans and Walt Disney’s customers consume content, Walt Disney changes its strategy and started to transition to a streaming service in order to keep its existing customer base and attract other customers eager to stream its latest content. This transition coupled with Walt Disney’s competitive advantage strategy of providing unique products and content is expected to grow the company’s revenue and keep it growing and competitive into the future. Consequently, Walt Disney has realigned its operations and is making investments to actualize the strategy of transitioning into a streaming service.
Walt Disney has a higher chance of successfully transitioning its business from its traditional roots to a global streaming giant. Over the past years, the company has invested in new distribution channels and changed its media and entertainment distribution strategy to optimize the achievement of its strategic goal. In particular, Walt Disney recognizes that the adoption of streaming technology has irretrievably disrupted traditional film and television content distribution means. Traditionally, films were first distributed in the theater market followed by the home market, and then the TV market. Further, episodic content would first be distributed in the liner and then TV markets. To respond to the changes, the company is implementing a two-prolonged strategy of monetizing a significant portion using the traditional media and creating its Direct to Consumer (DTC) streaming service.
Given that Walt Disney’s direct-to-consumer digital service is in its early development and implementation stages, the company is producing exclusive content for its streaming platform, and rather than selling it to the TV market, it is distributed through the streaming service Disney plus. The company is also making some films available to the streaming service at the same time that the film is available in theaters. In addition to monthly subscriptions, the company is exploring introducing pay-per-view content on the platform to maximize its revenues and ensure that its customers have access to a broad range of content. The transition to a streaming service was in a large part hastened by the Covid-19 pandemic. During the pandemic, people who had nowhere to go and nothing to do due to lockdown searched for preferred streaming content rather than watching their favorite content on TV. This consumer behavior sent shares and revenues of streaming services such as Netflix soaring to new heights and inspired Walt Disney to hasten its transition.
When a company such as Walt Disney is undergoing a strategic change such as the one it is undergoing now, some changes in its balance sheet could affect the company’s strategy. In particular, changes related to the company’s solvency, profitability, liquidity, and earnings have a significant bearing and could impact the direction and pace of strategic shift. During the fiscal year ended 2021, Walt Disney’s balance sheet underwent some significant changes that could impact the company’s strategy. Specifically, there were significant changes in Walt Disney’s assets and liabilities and equity. The company’s net assets increased to 203.6 billion from 201.5 billion a year earlier (SEC, 2021). Further, liabilities and equities experienced similar changes in terms of the amount and percentage.
The specific changes in the Company’s assets were experienced in the company’s holding of cash and cash equivalents. This category of company assets decreased by 1.955 billion from 2020 to register at $15.959 billion in 2021 (SEC, 2021). These decreases in the company’s cash and cash equivalents could impact the company’s strategy if the change is significant enough to impact the company’s going concerned or solvency. However, a decrease of $1.9 billion while significant is relatively low when compared with the company’s asset portfolio. The decrease could also mean that any new capital raised by the company during the year went into implementing the company’s strategy rather than being kept in liquid form to boost the firm’s liquidity position. If new capital is employed in the achievement of a company’s strategy, the chance of success and failure also increases.
Further, Disney’s net receivables increased by $ 659 million which is a positive thing because it means that the company’s products were being sold and thus liquidity for the implementation of the company’s strategy was guaranteed. Finally, the company’s projects in progress saw an increase of $ 72 million meaning that the company was forging ahead with its strategy of transition from traditional media to streaming services (SEC, 2021).
On liabilities and equity, accounts payable and other accrued liabilities saw a massive increase of $ 4.093 billion in the fiscal year 2021 which represented a 24.36 percent increase from the previous period (SEC, 2021). Such a rapid increase could have negative consequences on the company’s ability to service short-term obligations and thus its ability to finance the implementation of its strategy. Payable and accrued liabilities are short-term debts that the company is expected to service within one year. Such an increase in this category of liabilities if sustained could strain the company’s liquidity and solvency and thus its corporate strategy. On the flip side, the company’s other long-term assets saw a significant drop of $2.682 billion from $17.204 in 2020 to $14.522 in 2021 (SEC, 2021). While long-term liabilities do not generally affect short-term goals, the drop in long-term liabilities means that the company’s interest obligations also drop and thus frees up some liquidity to finance the achievement of the company’s strategy.
Walt Disney Financing
To keep their operations going, companies must have the necessary resources or be able to raise the necessary resources to finance them. A behemoth such as Walt Disney has several options when it comes to its financing because of its history of profitability, a solid customer base, and the fact that it is listed on the stock market. Generally, companies are financed from various sources such as capital markets, loans, retained earnings, venture capital, and franchising. The sources available to Walt Disney include the capital market, retained earnings, and bank loans as evident through the company’s balance sheet. A company can raise money through equity finance in the capital markets. This entails selling an ownership stake to investors who become shareholders. During the fiscal year ended 2021, Walt Disney’s authorized shares were 4.6 billion while the shares issued to investors stood at 1.8 billion according to the company’s 2021 SEC-10K filing (SEC, 2021). The shares had a par value of $0.01 and a value of $55.471 (SEC, 2021).
The net outstanding amount for Walt Disney’s common shares fell from $55.497 billion to $55.471 representing a net decrease of $26 million (SEC, 2021). Such a decrease could mean that Walt Disney had enough liquidity during the year to implement a share buyback plan. A share buyback plan is a strategy used by corporate chiefs to boost the value of a trading company’s shares and rebalance the balance sheet. This strategy is implemented when a company has enough liquidity to cover short-term liabilities that fall due and when a company’s shares are on an upward trajectory. As noted through the analysis of changes in Walt Disney’s balance sheet, the company did not receive any new funds from the sale of shares during the fiscal year 2021. Rather, the company spent money to repurchase its shares. Such a move by the company has the potential to impact the company strategy especially if such a share repurchase resulted in an increase or decrease in the value of the company’s common stock.
The second financing source apparent in Walt Disney’s balance sheet is retained earnings. Other than opportunity costs, retained earnings a generally a free source of financing for companies. Retained earnings represent an amount of a company’s gross profit accumulated over the years after distribution to shareholders through dividend payment has been made. Because of years of profitability, Walt Disney’s accumulated earnings stood at a massive $40.429 billion which was an increase from the previously recorded figures of $38.315 billion in 2020 (SEC, 2021). Such a massive increase means that despite paying its shareholders annual dividends, Walt Disney was left with enough profits to boost its already massive retained reserves. The company can draw resources from this reserve when a need arises. At a strategic level, such a massive reserve means a lower cost of capital for the entire company.
The final source of financing available to Walt Disney is bank loans. No matter the amount or terms involved, loans are expensive and cost companies billions in interest payments each year. Borrowing makes up a significant source of financing for Disney whereby the amount outstanding at the end of the fiscal year 2021 was $48.540 billion (SEC, 2021). This figure represented a decrease from $52.917 billion recorded the previous year. Therefore, Walt Disney’s borrowing fell by $4.337 billion or 8.27% in the yea (SEC, 2021)r. This could explain the massive drop of more than $4 billion in cash and cash equivalents noted earlier. The outstanding borrowings can have a bearing on the company’s strategy especially if a short repayment period of fewer than five years is involved.
From the analysis of Walt Disney’s sources of finances for the fiscal year 2021, three things stand out. First, the value of the company’s outstanding common stock decreased meaning a share repurchase program could have been in effect. Second, retained earnings for the same period increased, and finally, the company’s borrowings were repaid to the tune of $4.3 billion (SEC, 2021). Therefore, because all the major sources of funds decreased instead of increasing (except for retained earnings which increased), Walt Disney financed its operations during the year from profits earned from sales. With realized profits able to finance operations, repay the company’s outstanding debt obligations, and add to the company’s retained earnings, Walt Disney is in an advantageous position to finance its strategic shift from a traditional media to a streaming giant.
Walt Disney is among the United States’ most iconic and recognizable multinational corporations globally. Years of consistent growth and profitability mean that its shares are highly sought in the stock market. Consequently, like many other multinationals whose stock price rose during the pandemic, Walt Disney’s stock reached multi-year highs during the pandemic and in early 2021. However, from late 2021, the company’s stock price shed most of its value and stabilized at between $187 per share and $90 per share (Macker, 2022). Further, market volatility means that the company’s share price can rise one day and fall the next day which is the trend with Walt Disney’s share price according to monitoring by Morningstar. The company’s stock price is also under pressure from a series of back and forth with Florida state concerning the company’s tax status in the state. A new statute that effectively eliminated Disney’s autonomy over its parks has led to a significant drop in Disney’s share price. Thus, despite expectations to the contrary, Disney’s stock is not rising.
Financial Ratios Analysis
Table 1. Walt Disney Current Ration 2017 – 2021
The current ratio is calculated by diving current assets with current liabilities. A company with sound liquidity should have a current ratio of more than 1 although the ideal ratio is 2. The current ratio measures the ability of a company to meet short-term debt obligations as they fall due (Franklin et al., 2019). Consequently, according to Table 1, Walt Disney would not have problems servicing short-term debts because its current ratio for 2021 was 1.08. For the five years under review, Walt Disney has improved its liquidity position from 0.81 in 2017 to 1.08 in 2017.
Table 2. Walt Disney Quick Ratio 2017 – 2022
The quick ratio is another liquidity ratio that assesses a company’s ability to service short-term debt obligations as they fall due. This ratio is preferred by investors because it estimates liquidity conservatively (Franklin et al., 2019). Walt Disney’s quick ratio as calculated in Table 2 has consistently improved over the five years under review from the lows of 0.74 in 2017 to 1.04 in 2021. Therefore, by any measure, Walt Disney is in a comfortable liquidity position which can help the company service short-term debt once it falls due.
Average Collection Period
The average collection period is calculated by dividing a company’s accounts receivables by its total net sales and then multiplying the figure by 365 days to get the average collection period in days. The average collection period represents the average time it takes for a company to receive payments from debtors (Franklin et al., 2019). According to Table 3, Walt Disney’s average collection period ranges between 58 and 80 days with the lowest average collection period being recorded in 2018 and 2018 and the highest being recorded in 2019. Over the last three years, the average collection period has improved to 73 days from 80 days recorded in 2019. While this is a considerable improvement it is still significantly higher than the recommended average collection period of 30 days.
Table 3. Walt Disney Average Collection Period – 2017 – 2021
|Total Net Sales||67,418||65,388||69,607||59,434||55,137|
|Average Collection Period||73||73||80.3||58.4||58.4|
The debt ratio is calculated by diving the total debts of a company by its total assets. The resulting figure represents the percentage of debt finance in the acquisition of assets. A ratio greater than one means the risk of default for the concerned company is significantly higher and any rise in interest rates could trigger a default on payments (Franklin et al., 2019). Thus, the dent ratio measures how a company’s assets are leveraged. Walt Disney’s debt ratio averages 0.5 for the five years under consideration. Thus, the proportion of debt in Disney’s total assets is 0.5 and the risk of default due to changes in interest rates is minimal.
Table 4. Walt Disney – Debt Ratio
Gross Profit Margin/ Net Profit Margin
The gross profit margin is a profitability ratio that assesses the percentage of profits that exceeds the costs of goods sold. It is calculated by dividing the result obtained by subtracting the cost of goods sold from the revenues realized with a company’s total revenues. This ratio shows how the effectiveness of a company’s management in generating revenues when the cost of goods sold is considered. Depending on the industry, a good gross margin varies, but a margin of 10 percent is considered average while a margin of 20% is considered high (Franklin et al., 2019). Walt Disney’s gross profit margin according to Table 4 is considerably high despite decreasing from the highs of 45.04% in 2017 to the current gross profit margin of 33.05%.
|Gross profit margin||33.05%||32.89%||39.57%||44.94%||45.04%|
Return on Assets
The return on asset ratio is a profitability ratio that measures a company’s profitability in relation to its asset. Ideally, a good return on assets should be five percent or higher. This ratio is calculated by dividing net income by the total assets of a company. According to figures calculated in Table 5, Walt Disney’s return on asset ratio fell below the ideal level in 2020 and has not recovered meaning that the company’s assets have not been utilized optimally (Franklin et al., 2019).
Table 5. Walt Disney Return on Assets Ratio – 2017 – 2021
|Return on Assets||0.98%||-1.42%||5.70%||12.78%||9.37%|
Return on Equity
The return on equity is a profitability ratio that gauges how efficiently profits are generated in relation to the shareholders’ equity. It is calculated by diving net income with total shareholders’ equity (Franklin et al., 2019). An ideal ROE ratio should average between 15 and 20 percent. After falling in the negative in 2020, Walt Disney’s return in equity recovered in 2021 but did hit the ideal levels of between 15 and 20 percent as shown in Table 6 below.
Table 6.Walt Disney Return on Equity – 2017 – 2021
|Return on Investment||2.25%||3.43%||12.44%||25.83%||21.74%|
Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of Accounting Volume 1 financial accounting. 12th Media Services.
Macker, N. (2022). Morningstar, Inc.: The Walt Disney Co – Stock Quote (DIS). Morningstar.
SEC. (2021). Walt Disney – Form 10 – K. Security Exchange Commission.