Disney’s (NYSE:DIS) box office will fund its digital plans

Although not as bad as some of its competitors, The Walt Disney Company (NYSE: DIS) has still seen a drop of more than 30% since the start of the year. In a choppy market, investors tend to shy away from companies that rely on subscription entertainment.

However, Disney is a diverse player in this space and has even managed to increase its subscriptions. Yet with the growth comes a significant content bill.

Discover our latest analysis for Walt Disney

Profit results

  • Non-GAAP EPS: $1.08 (missed by $0.11)
  • Revenue: $19.24 billion ($800 million shortfall)

By segment:

  • Media and entertainment distribution: US$13.62 billion
  • Parks, experiences and products: US$6.65 billion

Revenue increase: +23.3% over one year

While revenue missed the mark, it’s critical to note that the company recognized $1 billion in reductions due to early license terminations for film and television content from prior years for use primarily on its direct services to customers. However, given that the media and entertainment segment contributes the vast majority of revenue, it was arguably a good move.

Disney+ added 8 million subscriptions against 5 expected, bringing the total to 138 million. The service will expand its global reach to 106 countries this summer, but content costs will increase by $900 million in the next quarter. The total content bill for this fiscal year is expected to reach $32 billion.

What is Walt Disney’s debt?

The graph below, which you can click on for more details, shows that Walt Disney had $54.1 billion in debt in January 2022, roughly the same as the previous year. It has $14.4 billion in cash, which offsets that, resulting in a net debt of about $39.7 billion.

NYSE: Dis Debt to Equity History May 13, 2022

A Look at Walt Disney’s Responsibilities

The latest balance sheet data shows that Walt Disney had liabilities of $30.0 billion due within the year and liabilities of $69.7 billion due thereafter. Meanwhile, it had $14.4 billion in cash and $14.9 billion in receivables due within a year. Thus, its liabilities total $70.4 billion more than the combination of its cash and short-term receivables. In absolute terms, that seems like a lot, but compared to the market capitalization of US$190 billion, that seems manageable.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short).

Walt Disney has a debt to EBITDA ratio of 3.8 and its EBIT covered its interest expense 4.3 times. This suggests that while debt levels are significant, we will refrain from labeling them as problematic. The silver lining is that Walt Disney increased its EBIT by 357% last year, although we must consider any comparison with 2020 to be heavily biased. You can check this free report showing analyst earnings forecasts for Disney’s future.

Finally, a business needs free cash flow to pay off its debts. Over the past three years, Walt Disney has created free cash flow of 18% of its EBIT, an uninspiring performance. This low level of cash conversion compromises its ability to manage and repay its debt.

Our point of view

Adjusted for license termination fees, Disney’s revenue report doesn’t look bad. Unfortunately, it would take extraordinary news to turn the stock price around in the current market environment.

While management has seen solid growth in Disney+ subscriptions, it’s worth pointing out that most of it comes from the Indian market, where the average revenue per user is well below that of the US market. On the other hand, the box office could provide a surprising boost in the current quarter as Doctor Strange, the latest installment in the Marvel Cinematic Universe, made a strong global debut earning at least 450 millions of dollars. So far, more sequels are planned for later this year, with Thor, Black Panther, and Avatar 2 potentially being big winners.

As for the balance sheet, the good news is that the company increased its cash flow to $1.77 billion, much better than $1.39 billion for the same period last year. With so many potential hits in the pipeline, we would be watching closely what the company does with that cash flow: reduce debt, restore the dividend, or go for growth. These decisions will be made by management.

The balance sheet is the obvious starting point for analyzing debt levels. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 1 warning sign we spotted with Walt Disney.

Sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.

About Myra R.

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