Stock Analysis

Is The Walt Disney Company's (NYSE:DIS) Stock Price Struggling As A Result Of Its Mixed Financials?

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NYSE:DIS
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Walt Disney (NYSE:DIS) has had a rough three months with its share price down 26%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Walt Disney's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out the opportunities and risks within the US Entertainment industry.

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Walt Disney is:

3.3% = US$3.6b ÷ US$108b (Based on the trailing twelve months to October 2022).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Walt Disney's Earnings Growth And 3.3% ROE

It is hard to argue that Walt Disney's ROE is much good in and of itself. Not just that, even compared to the industry average of 10%, the company's ROE is entirely unremarkable. For this reason, Walt Disney's five year net income decline of 40% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared Walt Disney's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 23% in the same period.

past-earnings-growth
NYSE:DIS Past Earnings Growth November 10th 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is DIS worth today? The intrinsic value infographic in our free research report helps visualize whether DIS is currently mispriced by the market.

Is Walt Disney Making Efficient Use Of Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Summary

Overall, we have mixed feelings about Walt Disney. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

What are the risks and opportunities for Walt Disney?

The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide.

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Rewards

  • Trading at 34.6% below our estimate of its fair value

  • Earnings are forecast to grow 29.32% per year

  • Earnings grew by 58.5% over the past year

Risks

No risks detected for DIS from our risks checks.

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About NYSE:DIS

Walt Disney

The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth3
Past Performance4
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Proven track record with adequate balance sheet.