Why Walt Disney Co’s (NYSE: DIS) 23% ROE Should Have Investors Excited

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Walt Disney Co’s (NYSE: DIS) most recent return on equity was an outstanding 23.2% in comparison to the Consumer Discretionary sector which returned 8.8%. Though Walt Disney’s performance over the past twelve months is highly impressive, it’s useful to understand how the company achieved its strong ROE. Was it a result of profit margins, operating efficiency or maybe even leverage? Knowing these components may change your views on Walt Disney and its future prospects.


ROE Trends Of Walt Disney

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It is calculated as follows:

ROE = Net Income To Common / Average Total Common Equity

ROE is a helpful metric that illustrates how effective the company is at turning the cash put into the business into gains or returns for investors. But it is important to note that ROE can be impacted by management’s financing decisions such as the deployment of leverage.

The return on equity of Walt Disney is shown below.

Walt Disney's ROE Trends Chart

source: finbox.io data explorer – ROE

It appears that the return on equity of Walt Disney has generally been increasing over the last few years. ROE increased from 17.3% to 19.6% in fiscal year 2016, decreased to 19.5% in 2017 and increased to 23.2% as of LTM Dec’17. So what’s causing the general improvement?


Walt Disney’s Improving ROE Trends

In addition to the formula previously discussed, there’s actually another way to calculate ROE. It’s often called the DuPont formula and is as follows:

Return on Equity = Net Profit Margin * Asset Turnover * Equity Multiplier

Analyzing changes in these three items over time allows investors to figure out if operating efficiency, asset use efficiency or the use of leverage is what’s causing changes in ROE. Strong companies should have ROE that is increasing because its net profit margin and/or asset turnover is increasing. On the other hand, a company may not be as strong as investors would otherwise think if ROE is increasing from the use of leverage or debt.

So let’s take a closer look at the drivers behind Walt Disney’s returns.

Net Profit Margin

It appears that the net profit margin of Walt Disney has generally been increasing over the last few years. Margins increased from 16.0% to 16.9% in fiscal year 2016, decreased to 16.3% in 2017 and increased to 19.6% as of LTM Dec’17.

DIS Net Profit Margin Trends

source: data explorer – net profit margin

Therefore, the company’s increasing margins help explain, at least partially, why ROE is also increasing. Now let’s take a look at Walt Disney’s efficiency performance to see if that is also boosting ROE.

Asset Turnover

It appears that asset turnover of Walt Disney has generally been increasing over the last few years. Turnover increased from 0.61x to 0.62x in fiscal year 2016, decreased to 0.59x in 2017 and stayed there as of LTM Dec’17.

DIS Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s increasing asset turnover ratio helps explain, at least in part, why ROE is also increasing.

Finally, the DuPont constituents that make up Walt Disney’s ROE are shown in the table below. Note that the table also compares Walt Disney to a peer group that includes Time Warner Inc.(NYSE: TWX), CBS Corporation (NYSE: CBS.A), Live Nation Entertainment, Inc. (NYSE: LYV) and World Wrestling Entertainment, Inc. (NYSE: WWE).

DIS ROE Breakdown vs Peers Table - DuPont Analysis

source: finbox.io’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Walt Disney’s general improvement in return on equity is the result of an improving net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Walt Disney shareholders have reason to be excited due to the company’s general improvement in profitability along with a general improvement in operational efficiency.

The DuPont approach is a helpful tool when analyzing how well management is utilizing shareholder capital. However, it doesn’t necessarily tell the whole story. If you have not done so already, I highly recommend that you complete your research on Walt Disney by taking a look at the following:

Valuation Metrics: how much upside do shares of Walt Disney have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Risk Metrics: what is Walt Disney’s asset efficiency? This ratio measures the amount of cash flow that a company generates from its assets. View the company’s asset efficiency here.

Efficiency Metrics: how much free cash flow does Walt Disney generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin here.


Author: Andy Pai

Expertise: financial modeling, mergers & acquisitions

Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights:

  • Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores.
  • Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets.

Andy can be reached at andy@finbox.io.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: Valuation, financial statement analysis. Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock. His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com. Matt can be reached at matt@finbox.io or at +1 (516) 778-6257.

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