Financial Issues, Cost-Volume-Profit, and Financial Ratio Analysis of Walt Disney

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Write an article about Disney including the following: Financial and Cost-Volume-Profit (CVP) analysis
3.1 Financial Issues Face by Disney
The Walt Disney Company operates in the consumer products, media networks and studio entertainment markets, and the company manages and operates amusement parks, parks and resorts, leisure and entertainment facilities (SEC, 2020). The Parks, experience, and products segment experienced a reduction in revenue from 26,786 million in 2019 to 17, 038 M in 2020 even as the direct-to-consumer & international market increased (SEC, 2020). Disney also reported a net loss in 2020, which makes it challenging to fund operations and pay all the workers in a difficult business environment. The company is competitive as it has high-quality content and protected the intellectual property. However, there are concerns that changes in consumer tastes and preferences will have adversely affected the demand for the company’s products and services.
Disney has been directly impacted by the coronavirus pandemic (covid-19) in the US domestic market and the international market. In the 2002 financial year, Disney was forced to close the Disneyland Resort business, and the business did not operate (SEC, 2020). Lockdowns and social distancing measures resulted in fewer visitors going to Disney, some of the company’s employees were furloughed, and there was a severe disruption in the global supply chain. Visits to Disney are an important component of the company’s earnings, and COVID-19 was one of the reasons for the company’s net loss in 2020.
Disney’s leverage ratios increased as COVID-19 had a significant negative impact on the company’s and combined with the loss and credit rating downgrade, Disney will incur higher borrowing costs (SEC, 2020). Furthermore, there was reduced operating cash flow in 2020, and there has only been a slight improvement in the first quarter of 2021. Disney is a large and complex company with links to global supply chains where economic performance in the US and global market affect the company’s growth potential. The coronavirus pandemic is one of the reasons for economic activity decline in 2020 where there has been reduced revenue and earnings.
There was also a rise in customer deposit refunds, which affected the company’s liquidity and occurred when there was a drop in cash inflows. While media network and entrainment are some of the major drivers on revenue, it is the parks and resorts, which have been impacted directly.
3.2 CVP Analysis
 The Cost-Volume-Profit analysis shows that the contribution margin ratio was lower in 2020 at 32.89% compared to 39.57% in the 2019 fiscal year / this was due to the revenue decreasing at a faster rate than the increase in the variable expense. Lower revenue and higher variable expenses are linked to a lower contribution margin. The contribution margin is useful in calculating the profit potential as it represents the revenue that covers the fixed costs and there is operating profit. The fixed costs increased from USD 16,899 million in 2019 to USD 23,449 million in 2020 and resulted in an operating loss in the 2020 fiscal year. The break-even in sales dollars would need to increase as Disney reported a loss in 2020 compared to the previous year.
The Break-even point (BEP is the appoint at which the revenue is equal to the sales. the BEP value in units and dollar value will increase as in 2020 the campy suffered a loss and more revenue is required to cover the costs. The revenue was USD 65,388 million in 2020 compared to USD 69,570 million in 2019 while the BEP was $ 71, 288.97 million and $ 42,702.70 million. The margin of safety in dollars determined as the margin of safety in units multiplied with the price per unit and also focuses on the difference between total budgeted sales and break-even sales in dollars. The margin of safety in dollars (5,900.97) million in 2020 and $ 26,904.3 million in 2019. The margin of safety percentage is -9.02% in 2020 and 38.65% in 2019. In 2021, the revenue is also projected to be lower than 2019 and the BEP higher.
* Break-even point in dollars = Fixed costs/ contribution margin
* 2020 Break-even point in dollars = 23,449 / 32.89%= 71,288.97
* 2019 Break-even point in dollars = 16,899 / 39.57%= 42,702.70
Financial Year

2020

Break-even in Sales Dollars

71289

Revenue

65,388

Variable costs

43,880

Fixed costs

23,449

Total costs

67,329

Break-even analysis chart 2020
The company reported costs on the cost of services and products, the selling, general, administrative (SG&A) expenses, depreciation, amortization and interest expenses (SEC, 2020). The SG&A expenses are the everyday costs that are not directly associated with the delivery of services and products. Disney deals with different fixed costs such as property taxes, salaries, insurance, utilities, interest expenses, amortization, and depreciation.
Operating labor costs remain one of the major cost drivers and this is especially in 2020 when there was a drastic fall in revenue. The net income (loss) was US$ millions 13,066 in 2018, then increased to the US $ millions 11,584 and a loss of US $ millions (2,474) in 2020 (SEC, 2020) The Degree of Operating Leverage (DOL) was determined as -1.64 in 2019 and increased to 19.66.3.3 Financial Ratios Analysis
3.3.1 Profitability
The gross profit margin declined in the years 2018 to 2020 from 44.94% to 32.89% in the 2020 fiscal year. Similarly, the operating profit margin declined as it was 24.91% in 2018, then 15.33% in 2019, and -2.97% in 2020, while the net profit margin was also negative. The return on equity (ROE) and return on assets (ROA) was equally negative as -3.43% and -1.42% respectively. There was a 52% decline in the movie studio revenues in 20202 as theaters were closed globally and there were no new films (Jasinski, 2020). A decline in cruise sales and docks caused a bigger drop in Disney’s Parks, Experiences, and Products segment (Jasinski, 2020). The only positive was increased revenues in the cable networks segment, but sports disruption increased costs (Jasinski, 2020).
3.3.2 Liquidity
The current ratio is determined as the current asset divided by the current liabilities. When the current assets are rising faster than current liabilities then the current ratio increases and vice versa, and comparing the average for its industry is necessary to determine overall performance (Brigham & Ehrhardt, 2016). Liquidity ratios focus on an organization’s ability to pay for the pending short-term obligations, mainly the current liabilities. In 2020, the current ratio was 1.32, indicating that the current assets were higher than the current liabil...