5/22/13

According to these numbers the ROCE dramatically decreased from 114% in 1997 to 3.8% in 2000. This happened because the company decided to take on less financial leverage (over a 5% decrease compare to 1997) and because the RNOA/NBC spread is negative. The spread being negative is not a good sign and let us know that their financial leverage policy is not favorable (ROCE<RNOA). Indeed, the company return on their net operating asset also decreased telling us that their operating profitability is lower. So from the shareholders standpoint, their investments profitability decreased compare to 1997 and the equity is not growing as fast from business activities. However, looking at the Shareholder equity we see that it increased from $1,679 M to $24,100. We could think that the shareholders investments gained value but from our previous analysis of the ROCE we see that they didnt. The companys operating income also decreased. Even though their revenue from sales increased it was not due to operating activities (profit margin decreased by around 6% so each $ of sale is less profitable than it used to be). The ATO is lower as well meaning that the company is making generating less sales revenue per dollar of operating assets. These two factors affect the RNOA (bringing it down) and therefore affecting the companys operating profitability as mentioned above. It is also interesting to notice that the ATO in 1997 is above 2 which means that the firm was using 50cents of its net operating assets to generate a $ of sale. Looking at the numbers we can also see that the firm decided to go on a cost saving program. In fact the OLLEL decreased by almost 2% bringing the companys net borrowing costs lower. Also, as mention before, the company has a lower FLEV because their net financial obligations are lower than their return on equity. We can also look at the P/B and P/E. In 1997 the P/B was really high which tells us that the company expected growth. In 2000, the P/B is lower but still over 1 so the company is still expecting growth. In addition, in 1997 the P/E was also high meaning that the company forecasted their future RE to be greater than 0 and also higher than their current RE. In 2000 on the other hand, the P/E is high. A high P/E and a low P/B means that the company forecasted their future RE to be low or negative in the future but that the current RE is even lower. To summarize, in 200 the firm decided to take much less risk by reducing their debt and increasing their stockholder equity (probably by selling and repurchasing stocks). However, it resulted in a lower dirty surplus and less value created for the firm. Also the return on investment for shareholders decreased. In 1997, the firm invested much more in its operating assets and generated more revenues thanks to that. They also expected more growth and returns. In 2000, Disney decided to change its tactic and to take on less risk by increasing its shareholder equity and decreasing its borrowings and liabilities. The firm is probably looking for a less rapid growth and more for a long term and stable growth. As for the shareholders, their investments are less

profitable but the Equity is still selling at a premium so the ROCE is forecasted to be greater than the cost of capital.

Sources http://cdn.media.ir.thewaltdisneycompany.com/2000/annual/ar_2000.pdf http://cdn.media.ir.thewaltdisneycompany.com/1999/annual/ar_1999.pdf