Final Project - Financial Analysis Report - MD

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Finance

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Jan 9, 2024

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Mariana Ducharme Southern New Hampshire University FIN 320 – Principles of Finance Lori Lothringer August 2023 FIN 320 – Principles of Finance Project Two Financial Analysis Report Financial Analysis and Financial Evaluation 1. Financial Analysis A. Financial Calculations i. Working capital Currently, as of July 2023, the company has a positive working capital of $1,940,000.00, which means that the company can repay debt and have easy liquidity. In July 2022, the company had a working capital of $718,000.00, the current working capital (2023) shows an increase of 170% from the previous year (2022). For the company, it means that the corporation has sufficient funds to pay for its operations, debts, or expansion plans, (Tuovila, 2006). ii. Current ratio The third quarter of 2023 shows that Walt Disney World Co. has a current ratio of 1.069 or 1.1. The company’s current ratio demonstrates that the company has more assets than liabilities, technically, the company could pay its liabilities 1.1 times over, (Girardin, 2022). In July 2022, the company obtained a current ratio of 1.023 or 1.0, like the current ratio for the most current quarter fiscal year. In this case, Walt Disney World Co. demonstrated to have enough liquidity to cover its short-term debts in the past two years. iii. Debt ratio 1

As indicated in the most recent quarter, Disney has a debt ratio of 0.52, while in July 2022, the company indicated a debt ratio of 0.55, which shows that the company obtained a small decrease in debt ratio and maintained stability by having more assets than debts during both quarterly periods. iv. Earnings per share Disney’s EPS significantly decreased from $0.79 (July 2022) to -$0.26 (July 2023). The company is experiencing a loss of -$0.26 for every share of outstanding stock, which at this moment means that the company is not generating profitability or positive growth from its shares. v. Price/earnings ratio On July 2023, Disney obtained a P/E ratio of -345.67, which was a decrease from 121.52 from the previous year. These ratios show that the company’s ratio is very low at this moment and perhaps not valuable for investments because a negative P/E ratio means that a business has negative earnings or is losing money, which could be only an unprofitable period, (Berger, 2023). vi. Total asset turnover ratio In July 2023, Disney obtained a total asset turnover ratio of 0.11, equal to 0.11 in July 2022. A total asset turnover ratio below one means a low efficiency, (Hayes, 2003). The company’s ratio is lower than one, but the company has large assets bases, so it is expected that assets will turn into sales/revenue slowly. vii. Financial leverage 2

In July 2023, Disney obtained a financial leverage ratio of 2.09, and in July 2022, a ratio of 2.21, these numbers are not so high, which means that the company has not taken a lot of debt to obtain financial growth. viii. Net profit margin In July 2023, Disney obtained a net profit margin of -0.0206 or -2%, and in July 2022, a net profit margin of 0.0655 or 7%. These numbers indicate a significant decrease; the current negative number, -2%, is considered a very low net profit margin, meaning that the company is not generating enough sales to be profitable at this moment. Cash flow should be analyzed. ix. Return on Assets In July 2023, Disney obtained a ROA ratio of -0.0023 or 0%, and in July 2022, a ratio of 0.0069 or 1%. In this case, the company obtained a decrease in the return of assets, however, these numbers could be very low due to the type and amount of assets that this company has such as properties/parks; however, at this moment, seems like the company is not generating profit for the money invested on assets. x. Return on Equity In July 2023, the Walt Disney Company obtained an ROE of -0.0047 or 0%, and in July 2022, an ROE of 0.0152 or 2%. A significant difference between the periods, and the ratio considered very low, this means that the company is being efficient in generating income from its equity. The higher the ROE, the better the company is obtaining profit from its equity, (Fernando, 2003). At this moment, the company is not obtaining positive profit from its equities. B. Working Capital Management Working capital is the financial metric that represents operating liquidity available for the company. Working capital represents the company’s available funds to pay for its operations, 3

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(Tuovila, 2006). In this case, the most recent quarter from July 2023, shows total current assets at $30,174,000.00 and total current liabilities at $28,234,000.00, thus, the working capital is calculated as $1,940,000.00. By obtaining positive working capital, the company shows the ability to handle its financial obligations for repayment of debt and easy liquidity. When a company obtains negative working capital, it means that the company has more short-term debt than available resources and may not be able to pay back debt obligations, (GoCardless, 2021). Working capital is useful because it can measure financial health and any approach to risks. Managers and investors should look at working capital to manage the business’s assets. C. Financing A business can finance its operations and expansions by using equity capital. Equity capital and debt can be obtained from investors, which will help finance operations/expansions in return for ownership of shares. Also, a company can borrow money to expand the business or fund losses, sell stocks, apply for government grants, or reinvest in profits, (Parker, 2012). D. Short-Term Financing The company obtained a lot of debt to finance potential financial growth, and the net profit margin is still very low, which indicates that the company is not generating enough profit from sales, this can be concerning for the company’s financial health. For the company, short-term financial goals could be beneficial. Short-term finance is any financing that a borrower can pay off over a shorter repayment period, (Wood, 2018). The company could set up short-term financial goals such as setting a budget to pay off its debts in a shorter period of time. It would be beneficial for the company to obtain a commercial bank loan, trade credit, or secured loan on a needed-project basis since the company works with multiple projects at the same time. Based 4

on the current financial health and reports, seems like the company plans to pay off debt and keep expanding, which are excellent goals. E. Bond Investment Considering a $30 million bond, with 9% interest, 8% coupon, a discount rate of 9%, and priced at $95 (discount), the current NPV obtains a negative value of -$425,297.00, which means that this bond investment wouldn’t generate a positive return for the company and Disney should research for another bond investments. F. Capital Equipment The option of leasing $25 million in equipment, with a discount rate of 12%, 15-year useful life, no salvage value, and an annual cash flow of $4 million, could be a good and valuable option for the company. The NPV calculation of $2,243,458.00 can offer profitability and stability to the company. G. Building The option of purchasing a $10 million building, with a 20-year expected useful life of the building, salvage value of $1.5 million, discount rate of 10%, cash purchase of $10 million, and the factor that the business generates an additional net profit of $1.25 million (after tax), the NPV calculation obtained was $864,920, which could be beneficial and a valuable investment for the company. 2. Financial Evaluation A. Bond Investment If the company considers investing in a corporate bond, a few factors need to be carefully analyzed. The bond investment opportunity is concerning due to unethical actions regarding child labor. Disney is a reputable corporation and needs to be responsible for investigating these 5

allegations before making a decision. Child labor is illegal in the U.S., if this is not properly addressed, it can lead to serious consequences and impact negatively the integrity of the company. Further, as previously discussed, by obtaining an NPV of ($425,297), this investment wouldn’t bring a positive profit for the company, and it could lead to social, legal, and ethical implications. B. Capital Equipment The capital equipment could be a good investment for the business. The equipment is environmentally friendly and newer, which will contribute to the company’s integrity and social responsibility. Also, the company’s production can cut costs and be more efficient. These factors can be beneficial and contribute to the company's financial health. By obtaining an NPV of $2,243,258, this investment becomes attractive to the company for several reasons. C. Building This could be an ideal investment for the company, the 10% discount rate on a $10 million cash purchase would eliminate high interest, also the expected profits of $1.25 per year are an attractive amount to obtain and accumulate in 20 years. The positive NPV of $864,920 determines that this investment can be positive and beneficial for the company, it could help to increase capital and assets over time. D. Future Financial Considerations Considering the current financial health of the company, Disney has obtained negative net profit and poor financial ratios, which are concerning. This is a very stable and reputable company with a large number of investments, assets, and equities. Regardless of the negative numbers, the working capital remains positive, which means that the company is generating enough to pay for 6

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its debts, the debt ratio was also low, which is good for the future of the company. I would suggest that the company reassess the cash flow management to verify why the net profit was so negative compared to the other fiscal quarters. Short-term goals could be beneficial for the company. Based on the current financial health and reports, seems like the company plans to pay off debt and keep expanding, which are excellent goals. The company has remained stable and successful for a decade now and an analysis of future projects is necessary to determine a forecast of the company’s financial growth and health. 7

References Berger, R. (2023, June 21). How To Understand The P/E Ratio – Forbes Advisor . Forbes Advisor; Forbes. https://www.forbes.com/advisor/investing/what-is-pe-price-earnings- ratio/#:~:text=A%20negative%20P%2FE%20ratio%20means%20a%20business%20has %20negative,have%20become%20a%20bad%20investment . Fernando, J. (2003, November 26). Return on Equity (ROE) Calculation and What It Means . Investopedia; Investopedia. https://www.investopedia.com/terms/r/returnonequity.asp Girardin, M. (2022, December 2). What Is the Current Ratio? Formula and Definition - Forage . Forage; https://www.facebook.com/theforage1. https://www.theforage.com/blog/skills/current-ratio GoCardless. (2021, July 21). Positive vs. Negative Working Capital | GoCardless . Online Payment Processing Solution | GoCardless; GoCardless. https://gocardless.com/en-au/guides/posts/positive-vs-negative-working-capital/ #:~:text=Positive%20working%20capital%20shows%20that,only%20to%20your %20current%20assets Hayes, A. (2003, November 19). Asset Turnover Ratio Definition . Investopedia; Investopedia. https://www.investopedia.com/terms/a/assetturnover.asp Mergent Online. (n.d.). Disney (Walt) Co. (The) (NYS: DIS) - Company Details . Retrieved August 10, 2023, from https://www-mergentonline-com.ezproxy.snhu.edu/companydetail.php? compnumber=2488 Parker, T. (2012, December 17). The Basics of Financing a Business . Investopedia; Investopedia. https://www.investopedia.com/articles/pf/13/business-financing-primer.asp Tuovila, A. (2006, August 13). Working Capital Management Explained: How It Works . Investopedia; Investopedia. https://www.investopedia.com/terms/w/workingcapitalmanagement.asp Wood, M. (2018, September 24). The Best Short-Term Finance Options for Business Owners . Fundera. https://www.fundera.com/business-loans/guides/short-term-finance 8