With its stock down 9.0% in the past three months, it’s easy to overlook Walt Disney (NYSE: DIS). We decided, however, to study the company’s financial statements to determine if they had anything to do with falling prices. Stock prices are generally determined by a company’s financial performance over the long term, which is why we have decided to pay more attention to the financial performance of the company. In this article, we have decided to focus on Walt Disney’s ROE.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Walt Disney
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Walt Disney’s ROE is:
2.5% = US $ 2.5B ÷ US $ 102B (Based on the last twelve months to October 2021).
The “return” is the amount earned after tax over the past twelve months. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.02.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Walt Disney profit growth and 2.5% ROE
It’s pretty clear that Walt Disney’s ROE is pretty low. Even compared to the industry average ROE of 11%, the company’s ROE is pretty dismal. Given the circumstances, the significant drop in net income of 33% seen by Walt Disney over the past five years is not surprising. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout rate.
So, in the next step, we compared Walt Disney’s performance to that of the industry and were disappointed to find that as the company slashed its profits, the industry increased its profits at a rate of 26. % during the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is the DIS correctly assessed? This intrinsic business value infographic has everything you need to know.
Is Walt Disney Using Profits Effectively?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This implies that potentially all of its profits are reinvested in the business.
All in all, we are a bit ambivalent about Walt Disney’s performance. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.