Analyzing Walt Disney's Debt: Is it a Risky Anchor or Manageable Burden?

Walt Disney (NYSE:DIS), like many others, utilizes debt as part of its financial strategy. The pivotal question, however, revolves around whether this debt is steering the entertainment giant into risky waters. Is Walt Disney using Too Much Debt?

In the realm of finance, Howard Marks' emphasis on the risk of permanent loss over share price volatility rings particularly true. For investors, the amount of debt a company carries is a crucial factor in assessing risk, as excessive debt can be a sinking anchor.

When Does Debt Become a Problem?

Debt becomes problematic when a company struggles to meet its obligations, resorting to either raising new capital or leveraging free cash flow. In dire situations, lenders might even seize control. More commonly, a company might have to dilute its shares at a lower price to regain control over its debt—a costly scenario. While debt can be a useful tool, especially for capital-intensive businesses, the balance lies in the effective management of both cash and debt levels.

Breaking Down Walt Disney's Debt

As of September 2023, Walt Disney's debt stood at US$46.4 billion, a slight decrease from US$48.4 billion the previous year. However, the company boasts US$14.2 billion in cash, resulting in a net debt of approximately US$32.2 billion.

Examining the balance sheet, liabilities of US$31.1 billion are due within the next 12 months, with an additional US$61.4 billion due beyond that period. Contrastingly, the company holds US$14.2 billion in cash and US$12.3 billion in receivables due within a year. This places Walt Disney with liabilities exceeding its cash and short-term receivables by US$66.1 billion.

Debt Metrics and Financial Health

Assessing the company's debt relative to its earnings power, the net debt to EBITDA ratio stands at 2.2 times, indicating a manageable level. However, the interest cover ratio seems a bit low, with EBIT covering interest expenses by only 6.0 times. While not overly concerning, it does suggest that interest payments might pose a burden. The recent 37% surge in EBIT, a testament to Walt Disney's financial health, makes managing its debt more feasible.

Looking at the conversion of EBIT to free cash flow, Walt Disney recorded a less-than-ideal 40% over the past three years. This implies a relative weakness in generating the cash required for debt repayment.

While the robust EBIT growth suggests Walt Disney can handle its debt, other factors raise cautious flags. The less-than-impressive conversion of EBIT to free cash flow indicates a potential hurdle in repaying debt. Investors should keep a keen eye on the balance sheet as the company navigates its financial commitments. While Disney appears well-positioned to manage its debt, ongoing monitoring is advised given the high debt levels. As always, the balance sheet offers critical insights, but external risks must also be considered in the dynamic world of finance.