Okay, return to reality.
You have the opportunity to invest in a profitable firm with high liquidity and modest debt. Or, you can invest in a profitable firm with poor liquidity and excessive debt. What’s your choice? Well, you can make money on both sides of the trade, but in order to determine the best investment, you must consider the price of the stock along with the insights garnered from financial ratios.
Let’s first look at liquidity.
| Disney | Time Warner | News Corp | Comcast | Viacom | |
|---|---|---|---|---|---|
| Current Ratio | 0.99 | 1.35 | 1.92 | 1.43 | 1.24 |
As shown above, News Corp (NASDAQ:NWS) is clearly in the best position to cover its current liabilities. However, just because a firm can retrieve cash when immediately needed does not make it a home run investment.
Even with liquidity and an 11% increase in its consistent quarterly dividend, some analysts think that Time Warner Inc (NYSE:TWX)’s attractiveness is declining. The company is trading near its 52-week high — the peak of a five year growth trend.
In 2012, nearly 80% of Time Warner’s operating income came from its TV networks and premium pay TV business segments. However, with increasing prices from cable and satellite companies, along with increased competition and low cost offerings from Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX), Time Warner may see a reduced number of subscribers. Be on the lookout for the new earning report release which will likely indicate how Time Warner will address such concerns.
Now consider how firms are financially leveraged.
| Disney | Time Warner | News Corp | Comcast | Viacom | |
|---|---|---|---|---|---|
| L-T Debt | 0.21 | 0.39 | 0.43 | 0.43 | 0.53 |
| Interest Coverage | 26.09 | 4.62 | 3.00 | 4.83 | 9.32 |
The Walt Disney Company (NYSE:DIS) is clearly the 10 pound gorilla in this segment. The firm earns over 26x its interest, while second-placed Viacom, Inc. (NASDAQ:VIAB) doesn’t even earn 9.5x its interest payments. With a market cap of 32.96 billion, being the smallest of the five companies behind Time Warner Inc (NYSE:TWX)’s 55.85 billion market cap, it makes sense why Viacom, Inc. (NASDAQ:VIAB)’s long-term debt ratio is so high.
Viacom, Inc. (NASDAQ:VIAB) has less equity and shares outstanding to dilute the debt financing the firm leverages for operations and growth. However, it is important for investors to also consider how the companies are structured and how cash flows enter and exit each firm.
The Walt Disney Company (NYSE:DIS), for example, has more expenses and cash outflows than its competitors. Therefore, it must boast a greater interest coverage ratio. However, it is significant to note that The Walt Disney Company (NYSE:DIS)’s $4.05 billion purchase of Lucasfilm, with about half cash and half stock, greatly affected its cash reserves.
DIS Free Cash Flow data by YCharts
Moving forward, The Walt Disney Company (NYSE:DIS) expects its revenue from the greatly anticipated Star Wars series to boost sales, cash flow, and investor return. Additionally, The Walt Disney Company (NYSE:DIS) made its first profit in 2012 from Hong Kong Disneyland. It boasted a 92% occupancy rate last year in the Hong Kong resorts, a 22% increase from 2009.
With its first Chinese theme park scheduled to open in late 2015, investors have another reason to imagine Disney taking them to new heights. As Robert Iger, Disney’s CEO, said “We believe this will be one of the most spectacular The Walt Disney Company (NYSE:DIS) experiences yet – and an important part of our future.”
