Question

Cash Flows are extremely important in finance. Companies try to improve their cash flow by investing in projects (capital investments) more so in todays times during this recent crisis for a company being able to maintain their day to day operations. There are three parts of cash flow statements, operating, financing and investing activities. Every business not matter what and who they are are interested in their cash flow for obvious reasons. These numbers are usually forecasted by the company, analysts and investors and can be updated at any time. Many companies may have negative cash flows yet continue to stay in business. Give an example of a The Walt Disney company's cash flow status on where it stands, good or bad, and why.

Answer 1

Two important questions to ask before you buy The Walt Disney Company (NYSE:DIS) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through Walt Disney’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

What is free cash flow?

Walt Disney generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.

There are two methods I will use to evaluate the quality of Walt Disney’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Along with a positive operating cash flow, Walt Disney also generates a positive free cash flow. However, the yield of 4.18% is not sufficient to compensate for the level of risk investors are taking on. This is because Walt Disney’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

NYSE:DIS Net Worth September 10th 18

Is Walt Disney’s yield sustainable?

Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Walt Disney’s expected operating cash flows. Over the next three years, a double-digit growth in operating cash of 19.1% is expected. The future seems buoyant if Walt Disney can maintain its levels of capital expenditure as well. Below is a table of Walt Disney’s operating cash flow in the past year, as well as the anticipated level going forward.

	Current	+1 year	+2 year	+3 year
Operating Cash Flow (OCF)	US$14.01b	US$14.70b	US$15.38b	US$16.69b
OCF Growth Year-On-Year		4.9%	4.6%	8.5%
OCF Growth From Current Year			9.8%	19.1%

Next Steps:

Given a low free cash flow yield, on the basis of cash, Walt Disney becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Now you know to keep cash flows in mind, You should continue to research Walt Disney to get a better picture of the company by looking at:

1. Valuation: What is DIS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DIS is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Walt Disney’s board and the CEO’s back ground.
3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

Liquidity ratio	Description	The company
Current ratio	A liquidity ratio calculated as current assets divided by current liabilities.	Walt Disney Co.’s current ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019.
Quick ratio	A liquidity ratio calculated as (cash plus short-term marketable investments plus receivables) divided by current liabilities.	Walt Disney Co.’s quick ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.
Cash ratio	A liquidity ratio calculated as (cash plus short-term marketable investments) divided by current liabilities.	Walt Disney Co.’s cash ratio improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.

Walt Disney Co., liquidity ratios

		Sep 28, 2019	Sep 29, 2018	Sep 30, 2017	Oct 1, 2016	Oct 3, 2015	Sep 27, 2014
	Current ratio	0.90	0.94	0.81	1.01	1.03	1.14
	Quick ratio	0.67	0.75	0.65	0.81	0.75	0.85
	Cash ratio	0.17	0.23	0.21	0.27	0.26