View of Disneyland profits minus flimflam still a picture of loss

PUBLISHED : Thursday, 20 January, 2011, 12:00am
UPDATED : Thursday, 20 January, 2011, 12:00am

Record revenues of HK$3 billion helped Disneyland report positive earnings before deducting interest, taxes, depreciation and amortisation (ebitda) for the first time: it reversed from a loss of HK$70 million last year to earnings of HK$221 million. SCMP, January 19

I have not yet visited our Disney park. My wife and I always meant to go but the kids are grown now and we just haven't got around to it. We haven't even gone to Ocean Park in recent years, at least not since Allan Zeman gave it the Lan Kwai Fong treatment.

Now don't get off the topic, Jake. The topic is this thing called ebitda and why it's flimflammery for anyone associated with Disney to cite this as a measure of profitability.

It's flimflam because ebitda is something you look at seriously only if you are thinking of buying a bankrupt asset and can do so on an operating basis without paying anything for it, without having to meet any further obligations to staff and without picking up its outstanding debt.

The only other reason to cite ebitda is if you are a securities analyst who wants to confuse clients with jargon to hide ignorance. It is very often used for this purpose.

Think about it. Under normal circumstances can you ignore interest payments on borrowings for your business when calculating your returns from it? What will your bank do if you stop these payments?

Equally, can you ignore tax demands and can you pretend that every piece of equipment and every building owned by your business will last forever and never need replacement?

No, under normal circumstances these things cannot be ignored, you say.

But there is one circumstance under which it can be done. If your business ever goes bust and the receivers are looking for someone to pick it up, the question becomes whether the business could be viable on an operating basis with all obligations nullified and assets valued at zero.

Under this circumstance, there is no interest or tax to pay and no further depreciation or amortisation possible. This is when ebitda comes into its own. If the business can generate earnings under these conditions, then someone is likely to keep that business going. The shareholders will lose all their money and the creditors can expect only a few cents on the dollar but an operating entity can still exist.

This is not our Disneyland, however. I've always thought of it as a loser and so far I have been borne out, for which piece of insight I will not say, 'I told you so', as there are thousands of others who said the same thing at the time.

But it is not bust and measures for bust companies ought not to be applied to it. Returns on this Disney theme park ought to be measured as net profits after interest, tax, depreciation, amortisation and provisions for any likely loss in the future, in other words, calculated the normal way.

And then we get a net loss of HK$720 million, which may be less than HK$1.3 billion last year, thanks to the visiting hordes from across the border, but which still leaves this loser struggling in the red and back on our doorstep, begging bowl in hand, looking for more money on the plea that the park is too small and a bigger park will be viable.

It's all about critical mass, Mickey Mouse will say. I caution you that never in history have two words wiped out more wealth.

But stop. We have discovered again what a loser this Disneyland is for the public purse of Hong Kong, its majority shareholder. Is it as big a loser for the Walt Disney Co?

I ask because most of the goods on sale at the park come through the hands of the company rather than direct from the original supplier. This is true right down to food and drink on offer. Did Disney take a cut or did it just pass all this on at cost?

I tried to find out from the Walt Disney accounts but, alas, I could not tease the answer to this question out of the published figures.

So let's not be naive. Of course, Disney takes a cut and I assume it's a hefty one. It's certainly what I would do in Disney's shoes and there is nothing illegal about it, particularly if Disney made it clear from the start that it would keep control of all goods and services, as it has done in this case.

And that leads us to the big question. If you look at Disney's investment on this wider basis, does it actually turn a profit on the Hong Kong park?

I suspect it does. Prove me wrong, Mickey.