Walt Disney and DreamWorks Animation, Research Paper Example

The Walt Disney Company (Disney) and DreamWorks Animation SKG (DreamWorks) are two of the leading producers of animated works in the world. The following financial analysis of the two companies makes use of the data from their respective 10-K reports for the year 2012 because 2012 is the last year for which the annual report for DreamWorks was available.

As far as the profitability of the two companies is concerned, Disney is significantly ahead of its competitor despite being a much larger company. DreamWorks had a negative profit margin of 4.86 percent as opposed to Disney which earned an impressive 13.44 percent net profit margin. Disney’s performance is even more impressive given the size of the company whose revenue at approx. $42.28 billion was over fifty times that of DreamWorks which earned total revenue of approximately $750 million during the same period. DreamWorks’ performance was specifically hurt by aggressive sales and marketing expenditure which is a norm in the entertainment sector and it seems highly likely DreamWorks’ films fell short of expectations in terms of box office receipts. Not surprisingly, Disney also generated better return for its shareholders at 13.54 percent as opposed to DreamWorks’ negative 2.71 percent return. Disney’s equity base is about three times larger than DreamWorks which means Disney probably relies more on debt and despite interest obligations, the company has done impressive returns.

As far as asset utilization is concerned, Disney is again ahead of its competitor. Disney’s total asset turnover rate in 2012 was 0.56 as opposed to DreamWorks’ 0.39 which shows that Disney employs its assets more efficiently than DreamWorks. It may be that DreamWorks has excessive asset base or some asset may not be as productive at DreamWorks as they are at Disney. DreamWorks may benefit by selling excess assets which could improve its total asset turnover rate and may also enhance its liquidity and operating efficiency.

As far as receivable turnover is concerned, Disney again takes the lead with receivable turnover of 6.46 as opposed to DreamWorks’ 2. Companies sometimes use more liberal credit policies to boost sales but Disney has achieved high sales levels despite efficient receivables management. This helps Disney enhance its liquidity and also reduces the risk of bad debts in the future. 2012 seems to have been a difficult year for DreamWorks and the company might have attempted to support sales through more generous credit extension to customers. It is also highly likely that Disney’s products have high demand, thus, the company doesn’t have as much need to extend credit to boost sales as DreamWorks.

In terms of liquidity, DreamWorks comes as a surprise winner. DreamWorks current ratio is 9.95 as opposed to Disney’s 1.07 which confirms that Disney is indeed highly leveraged as opposed to DreamWorks. DreamWorks may not be as profitable as Disney, thus, low financial leverage is a wise policy in order to ensure liquidity and low interest expense also keeps potential loss at lower levels. In this regard, Disney could take a lesson from DreamWorks and reduce its short term and long term debt which will not only improve its liquidity position but also further enhance profitability due to lower interest expense.

As far debt utilization is concerned, DreamWorks had a debt to total assets ratio of  0.31 as opposed to Disney’s 0.44. This means Disney’s management has a greater preference for debt as a funding source as opposed to DreamWorks. Debt has certain benefits such as not diluting equity stake of shareholders and moreover, it is also at times cheaper source of funding than equity. But at the same time, debt funding negatively affects profit and liquidity position. Disney is a huge company as opposed to DreamWorks and the company is also highly profitable. While Disney has a greater financial leverage than DreamWorks, it is still not at a level where it should be a cause of concern. But the management may benefit by using some of the profit to reduce debt levels and increase both profitability and liquidity position.

Conclusion

It is apparent that Disney is winning the competition against DreamWorks. Disney’s management has been doing a great job of managing the company, especially given its behemoth size and managing big companies is not an easy task. Disney has not only managing its profitability well but also its liquidity as evident by its efficient receivables management policies. Disney may also be benefitting from the fact that it is more diverse company than DreamWorks and doesn’t only earn from movies but also other businesses such as theme parks, merchandise, and media channels. This may explain why DreamWorks’ performance is highly dependent upon how well its movies perform and this also means DreamWorks performance may fluctuate more than Disney from year to year. Disney may also be reaping the fruits of Pixar acquisition that has developed a reputation for giving only box-office hit movies.

The most positive aspect of DreamWorks’ operations is its low financial leverage which ensures that the company’s existence is not threatened in years of poor performance. The company has low debt which also means lower interest obligations and better liquidity. DreamWorks may benefit by selling off some less-profitable assets which should improve its liquidity position as well. DreamWorks may also benefit by expanding into other businesses because movie business is highly unpredictable.

Overall, Disney is a better candidate for investment and even 2012 performance shows Disney’s candidate earned more impressive returns on their investment as opposed to DreamWorks’ shareholders.