Here's What's Concerning About Walt Disney's (NYSE:DIS) Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Walt Disney (NYSE:DIS), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Walt Disney is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$10b ÷ (US$198b - US$31b) (Based on the trailing twelve months to December 2023).
Thus, Walt Disney has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 9.1%.
See our latest analysis for Walt Disney
In the above chart we have measured Walt Disney's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Walt Disney for free.
So How Is Walt Disney's ROCE Trending?
On the surface, the trend of ROCE at Walt Disney doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Walt Disney's ROCE
Bringing it all together, while we're somewhat encouraged by Walt Disney's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 8.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we've found 1 warning sign for Walt Disney that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
