With its stock down 5.4% over the past three months, it’s easy to overlook Walt Disney (NYSE:DIS). However, we decided to study the financial condition of the company to determine if they had anything to do with the price drop. Long-term fundamentals usually drive market outcomes, so it’s worth paying close attention to. Specifically, we decided to study Walt Disney’s ROE in this article.Thank you for reading this post, don't forget to subscribe!
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investments it receives from its shareholders. In other words, it is a profitability ratio that measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Walt Disney
How to calculate return on equity?
Return on Equity Formula Is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Walt Disney is:
2.7% = US$3.0b ÷ US$111b (based on trailing twelve months to July 2023).
‘Return’ is the annual profit. One way to conceptualize this is that for every $1 of shareholders’ capital, the company made $0.03 in profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate the company’s ability to generate profits in the future. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily possess these characteristics.
Walt Disney’s earnings growth and 2.7% ROE
As you can see, Walt Disney’s ROE looks pretty weak. Even when compared to the industry average of 12%, the ROE figure is quite disappointing. Given the circumstances, the significant 38% decline in Walt Disney’s net income over the past five years is not surprising. We believe there may be other factors that are negatively impacting the company’s earnings prospects. For example, the business has allocated capital poorly, or the company has a very high payout ratio.
the story continues
So, as a next step, we compared Walt Disney’s performance against the industry and were disappointed to find that while the company has been growing its earnings, the industry has been growing its earnings at a rate of 13% over the past few years .
past earnings growth
The basis of valuing a company is largely linked to its earnings growth. Investors next need to determine whether expected earnings growth, or the lack thereof, is already baked into the stock price. By doing this, they will get an idea of whether the stock is headed for clear blue waters or murky waters await. 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 using its profits efficiently?
Walt Disney pays no dividends, meaning potentially all of its profits are being reinvested in the business, which doesn’t explain why its earnings would drop if the company were retaining all of its profits. Is. It seems that there may be some other reasons to explain the shortfall in that regard. For example, business may decline.
Overall, we’re a little ambivalent about Walt Disney’s performance. Although the company has a high rate of reinvestment, a low ROE means that all the reinvestment is not yielding any benefits to its investors, and moreover, it is having a negative impact on earnings growth. When this happens, the latest industry analyst forecasts suggest that analysts expect to see a huge improvement in the company’s earnings growth rate. Are these analysts’ expectations based on broader industry expectations or on the company’s fundamentals? Click here to visit our analyst forecasts page for the company.
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This article from Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts using unbiased methodology and our articles are not intended to provide financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.