Capital is the lifeblood of business operations. It helps organizations meet daily and long-term financial needs. Companies raise capital through debt and/or equity. Usually, it’s some mixture of the two, which is referred to as capital structure. Analysts review the capital structure of a firm to gain insights about management's strategic relationship with, and reliance on, outside capital. A company with a strong growth strategy has a heavy reliance on outside capital, however, a mature company, such as Walt Disney Company (NYSE: DIS), can get away with a more conservative approach to capital structure.

Capital Structure

Capital structure varies based on industry and corporate financial strategy. Companies using more debt than peers may also be riskier, since debt payments must be paid back even if earnings come in negative. Equity, on the other hand, does not need to be paid back, but it generally costs more to raise equity capital than debt, particularly in periods of low interest rates. This is why many companies, such as Disney, increased cash and total debt in 2015. Disney increased cash from $3.4 billion in December 2014 to $4.3 billion in January 2016. It also increased debt by $4 billion, from $14.8 billion in December 2014 to $18.9 billion in January 2016.

Disney’s Debt and Equity Capitalization

Disney has a well-diversified portfolio of debt. Total debt consisted of $6 billion in short-term debt, $0.2 billion in revolving credit, $0.5 billion in term loans and $13.6 billion in bonds. In total, the company had $15 billion in long-term debt in January 2016, up from $12.7 billion in December 2014.

Debt isn’t the only component of Disney's capital. Equity, as measured by market capitalization, was $181.9 billion in January 2016, up from $165 billion in December 2014. Market capitalization is calculated by multiplying the number of shares outstanding by the share price of the company. Since the number of shares outstanding at Disney remained flat over the same time period, the change in capitalization must be due to an increase in the price of Disney shares. Indeed, Disney’s stock price increased from approximately $90 in mid-December 2014 to $103 in mid-April 2016.

Disney’s Enterprise Value

Another way to measure capital is with the enterprise value. The enterprise value is calculated much like market capitalization, except it includes debt and cash. In other words, it takes market capitalization, adds cash, then subtracts debt. Those companies looking to buy out other businesses as a growth strategy prefer enterprise value as a measure of total cost because it is considered a more accurate representation of the full cost of the business. Since market capitalization at Disney increased, it’s not surprising that enterprise value increased as well, from $179.8 billion to $200.7 billion. The difference between a market capitalization of $181.9 billion and the enterprise value is debt, which is $18.9 billion, and cash, which is $4.3 billion.

Bottom Line

Capital is a tool used by companies to finance company operations and growth projects. Some companies prefer the use of debt, especially in low-interest-rate environments. Other companies prefer equity because it doesn’t need to be paid back. Most companies, such as Disney, strive to find some optimal balance between debt and equity to help grow operations without substantially increasing risk. Disney’s market debt to equity is approximately 10%, compared to the industry average of approximately 29%. This is low compared to Disney’s peer group, which suggests that Disney’s capital structure does not present any risk to future company earnings. However, Disney's capital structure suggests that it may actually be too conservative in its approach to debt. Some analysts may even say that the company is leaving cheap money on the table.

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