Financial Position of SeaWorld - Case Study Example

SeaWorld of Executive summary The paper focuses on theme park industry with the primary objective to discuss recent activities of SeaWorld and consequences of the same on the financial position of the firm. The paper discusses the business of the parent company and its subsidiary SeaWorld. SeaWorld is one of the renowned theme parks of the United States. It is not only an entertainment park but also a research facility, whose primary aim is to study aggrieved animals, nurture and rehabilitate them. The company has recently been scandalised after CNN released a documentary about improper habitat facility of killer whales in the park. This has significantly affected the revenue of the company. In this paper, the overall situation of the company has been critically assessed and recommendations regarding equity ownership have been provided. Introduction In recent years, it has been observed that the theme park industry is growing at a rapid rate worldwide. The growth is comparatively high in economies such as Asia, Europe and the United states (US). The paper focuses on SeaWorld; an US based entertainment and theme park, its activities and impact of these activities on the financial position of the company. In the following section, a brief history of the company along with its products will be discussed as well as assessment has been conducted regarding its activities and market reputation. Additionally, financial ratio analysis and SWOT analysis will be conducted so that financial position of the company is assessed and recommendations can be provided regarding its stock to its shareholders. Brief history The business roots of Sea World Parks & Entertainment can be traced back to 1959 when the company opened a small garden and bird sanctuary. The garden and sanctuary grew to the first free-range habitat of animals and other zoological attraction along with entertainment sources such as shows and rides in the US. Over the time, the company grew and created a number of theme and entertainment parks, namely, SeaWorld, Busch Gardens, Sesame Place, Adventure Island, Water Country USA, Discovery Cove and Aquatica (SeaWorld Parks & Entertainment, 2014a). SeaWorld was started in 1964 as an underwater restaurant as per the original plan of the founders, but the concept was further developed into marine zoological park that spread across 21 acres along the Mission Bay shore in San Diego. In the first year itself, the concept was a success as it attracted about 400,000 visitors even on a small budget and with limited number of employees. Presently, there are three SeaWorld parks in the US located in San Diego, San Antonio and Orlando. The entertainment park has been rated as the best marine life park in recent years. It has also gained a lot of attention and recognition in the industry for business practices, zoological and environmental services and educational features (SeaWorld Parks & Entertainment, 2014b; 2014a). From business perspective, SeaWorld Parks & Entertainment is a subsidiary of the parent company, SeaWorld Entertainment, Inc that is registered with New York Stock Exchange. Besides entertainment and educational experience, SeaWorld is also known as one of the leading zoological organisations in the world for animal welfare, husbandry, training and veterinary care. The company has made sufficient contribution towards providing advance care to species in zoological facilities and wildlife rescue, research and conservation. Presently, SeaWorld employs around 23000 individuals nationwide in various segments of the entertainment parks (SeaWorld Parks & Entertainment, 2014a; 2014b; 2014d). Products and services of SeaWorld The company is well known for collective care for one of the largest collections of animals in North American continent that comprises approximately 86000 animals inclusive of around 8000 terrestrial and marine animals and about 78000 fish species. The research facilities of the company care for various rare species such as Cheetah, West Indian Manatee, polar bear, Rhinoceros and Bengal tiger besides delivering entertainment and educational experience to visitors. The SeaWorld parks inspire visitors through entertainment and provide them an opportunity to connect with and care for the natural world. The theme parks of the company are located in almost all prime locations in the US, namely, Florida, California, Texas, Virginia and Pennsylvania, which attracted around 23 million visitors in 2013. The company organises various educational experiences for developing deeper understanding of the natural world. These activities involve camp programs, workshops, instructional field trips, national award programs and instructional field trips. Each theme park has around 100 animal habitats, approximately 200 entertainment rides and more than hundreds of informational shows along with restaurants and speciality shops as a part of its product and service delivery. The company has also licensed a variety of products including toys, books, apparels, movies, games and back-to-school items (SeaWorld Parks & Entertainment, 2014b; 2014c). Organisational assessment The paper assesses elaborately the way animals are treated at SeaWorld. The company has invested sufficiently in wildlife research as a part of wildlife conservation and welfare. The named commitment involves publishing research reports by SeaWorld, developing controlled environment for animals in the park and providing fund for similar projects worldwide. The park presents a unique environment for various external researchers and internal team of the park for understanding marine lives and their habitats in a better manner. Animal health professionals of the park make sufficient contributions regarding the same by gaining insights from animal care. Moreover, the park work in collaboration with a number of universities and research organisations so that various scientists can conduct studies on various subjects related to marine life. It has been ascertained that this efforts has helped a lot in strengthening the research of the company in this field (SeaWorld Cares, 2014a). The company also provide direct financial and materialistic support to various field researchers through SeaWorld and Busch Gardens Conservation Fund. The animal health team at the park has so far contributed in publishing multiple numbers of peer-reviewed studies regarding research on marine lives. The company has been successful in developing program regarding breeding of killer whales (Orcinus Orca), sea lions, dolphins and other species. The company claims that more that 80 percent of marine mammal were bred under human care and scientific observation. The animals that bred in the park are well taken care of so that scientist can understand their development and growth process, which is otherwise not possible. The various milestones of the company with respect to animal rescue are discussed as follows (SeaWorld Cares, 2014a; 2014b). The first animal rescue team was formed as SeaWorld opened in 1964 in San Diego. In 1976, the park members rescued first manatee. Ever since, the company has participated in numerous wildlife rescue operations which also include rescue of endangered sea turtles at the Gulf of Mexico affected British Petroleum oil spill in 2010 (SeaWorld Cares, 2014c). SeaWorld’s rescue team works in collaboration with various federal, state and local organisations for assisting injured, ill and orphaned animals (SeaWorld Cares, 2014d). However, it was recently ascertained in a documentary by CNN that the condition of the habitats of killer whales at Orlando are less than ideal. This documentary had immense negative impact on the stock of the company and stocks were found to be dropped by about 33 percent. The company has proposed construction of appropriate facilities over the next three years. However, animal rights group, PETA is not satisfied with the declaration and wants complete release of the killer whales (CNN, 2014). Stock analysis of SeaWorld The company started trading in 2013 in the NYSE and raised its initial public offering at $27 per share prior to the release of the documentary named “Blackfish” (CNN, 2014; Bloomberg, 2014a). Blackstone Group that controlled operations of the theme park rejected takeover bids from Onex Corporation and Apollo Global Management and chose SeaWorld instead, due to high expectation with respect to returns from the company. However, a report by Bloomberg suggests that after the documentary scandal, Blackstone has reduced its stake to a mere 22 percent (Yahoo Finance, 2014a). A large number of stakeholders of the company have backed out due to heavy loss that the company suffered because of the protests regarding release of Killer Whales by PETA. Additionally, investors have complained about violation of securities act of 1933 and securities exchange act of 1934 by the company as it misrepresented reasons related to declining attendance. Bloomberg report suggests that the company obscured information such as negative publicity due to the CNN documentary and pressure from animal right group regarding prohibition of captivity of Orcas from investors (Bloomberg, 2014b; CNN, 2014). SeaWorld’s stock tumbled by 33% and presently its share price is around $20 while reports suggest that the highest value so far was $35.30 and lowest being $17.83. The share price movement of the company for past 6 months is represented in the following graph (Bloomberg, 2014c). Figure 1 (Source: Bloomberg, 2014c) Ratio analysis of SeaWorld Financial ratios represent relationship between two different entities from financial statements and overall impact of the relationship on the financial position of the concerned firm. The ratios that have been calculated in this paper include liquidity, solvency, efficiency and profitability ratios. The primary reason for calculating these ratios is to understand financial position of SeaWorld and suggest improvement measures if any required (Yahoo Finance, 2014b; 2014c). Table 1 (Source: Author’s creation) Liquidity ratio Liquidity position of a firm is measured using current and quick ratios under liquidity ratio analysis. Current ratio: The current ratio of the company was calculated to be 0.96:1 for 2013. The current ratio measures the ability of the firm to pay off its short term obligations. In other words, it reflects whether a firm has sufficient resources for meeting various debts that are payable within a year’s time. The general industry benchmark is 2:1 for current ratio; however, it was ascertained that the current assets of SeaWorld is not sufficient to meet its existing obligation. The situation may result in short term liquidity crunch for the company. Quick ratio: Quick ratio is considered as a better measure of a firm’s liquidity than current ratio because the ratio does not take in consideration inventory, which is considered as a relatively less liquid asset. The industry benchmark for quick ratio is 1:1 while that of SeaWorld was observed to be 0.82:1. It was determined that the short-term liquidity position of SeaWorld is in troubled water since the negative publicity of the company because of CNN documentary (White, Sondhi & Fried, 1994; CNN, 2014). Solvency ratio Solvency ratio reflects a firm’s long term positioning and is also known as leverage ratio. The leverage ratios take in account a firm’s equity, debt, assets and earnings to determine a firm’s ability of sustaining long-term business scenarios and expenses. Debt equity ratio: The debt equity ratio compares a firm’s total debt with respect to its net equity capital. A capital-intensive business such as SeaWorld, require higher debt investment because supporting an extensive business of its kind solely based on equity capital can be highly complicated. However, the calculated ratio was determined to be exceptionally high even for a capital-intensive firm. The debt equity ratio of the company is 2.56 whereas industry standard suggest that for capital-intensive firms, it should be close to 2:1 or less (Vogel, 2010; Will, Subramanyam & Robert, 2001). Debt to asset ratio: Total debt to asset ratio highlights the proportion of total debt that has been consumed by the total asset of the firm. From the ratio analysis, it was noticed that about 75% of assets of the firm has been purchased with debt funding. High level of debt investment in long-term assets can result in poor return to creditors and affect the credibility of the firm. The ratio suggests high degree of leverage on the part of SeaWorld, thereby, indicating high scope of financial risk. Interest coverage ratio: Interest coverage ratio is also denoted as debt service ratio because the ratio focuses on a firm’s ability to earn sufficient profit to be so that it is in a position to pay off all its interest charges. The ratio reflects relationship between earning before profit and tax and interest charges on long term debts. The interest coverage ratio of SeaWorld is 1.81 while the acceptable industry benchmark is five times and above. Therefore, it can be suggested that the company is in a critical position and on verge of financial risk (Will, Subramanyam & Robert, 2001). Efficiency ratio Gross profit ratio: The gross profit ratio measures the margin of profit that is available on the total revenue earned by the company. There is no specific ratio or standard provided for gross profit margin but a higher ratio reflects better financial health for a company. The gross profit margin of SeaWorld was calculated to be around 41 percent. Given the circumstances, it can be assumed that the cost of sales of the company has increased because of declining attendance of visitors in the theme parks (Will, Subramanyam & Robert, 2001). Operating profit margin: A firm earns operating profit after meeting all the operating expenses from the gross profit. Operating profit margin reflects relationship between operating profit and net sales. It reflects a firm’s efficiency in earning maximum profit after meeting various operational costs. The operating profit ratio of SeaWorld was calculated to be about 14 percent, that is, about 66 percent less than gross profit. From this calculation, it can be ascertained that since the negative publicity, the operating expenses of the company has increased significantly compared to the revenue it is earning at present (Will, Subramanyam & Robert, 2001). Total asset turnover ratio: The total asset turnover ratio is a proportionate relationship between cost of goods sold or cost of sales and the total asset of a company. The ratio highlights the efficiency of a firm in utilising its total assets in maximisation of sales. However, an extremely high turnover ratio is not preferable because that would suggest excessive utilisation of assets. The asset turnover ratio of SeaWorld is 0.57, which is neither high nor low and is acceptable (Will, Subramanyam & Robert, 2001). Profitability in terms of investment Return on equity: Return on equity measures the degree to which a company is utilising its shareholders’ equity to generate revenue. The return on equity was determined to be around 8% only, which is relatively less considering the nature of business of SeaWorld. The low return c an be attributed to the negative publicity by the CNN documentary (Penman, 2007). Return on capital employed: Unlike return on equity, return on capital employed evaluated firm’s ability to employ total capital in increasing its earnings. In context of SeaWorld, the ROCE was ascertained to be as low as 2.17 percent. It suggests that the firm’s capital deployment policies are not sufficiently effective (Penman, 2007). SWOT Analysis of SeaWorld Strength Weakness The company is a subsidiary of SeaWorld Entertainment Inc and is located in three prime locations, namely, San Diego, Orlando and San Antonio. The main advantage of the theme parks of SeaWorld is that it is accompanied by other theme parks of the parent company, thereby, providing a holistic source of entertainment. SeaWorld is also known for its various education experiences that they provide to students and children beside entertainment. Another major strength of SeaWorld is its position in the entertainment industry. With limited number of competitors, SeaWorld has often been considered as the most visited amusement park in the US (SeaWorld Parks & Entertainment, 2014b). The primary weakness of the company is that even though it is popular in the US, it is not as popular as other US based theme parks, outside the country. Additionally, the revenue structure of the company has been affected severely when CNN documentary regarding orcas went viral. It was ascertained that the theme park’s animal habitat structure are not as appropriate as it has claimed so far. Consequently, the company is on the verge of facing major financial risk. In this context, one major weakness that was acknowledged in SeaWorld is that about three fourth of the debt, capital has been invested in assets of the park but the returns are relatively less (CNN, 2014). Opportunity Threat The opportunities that were recognised in SeaWorld and its strategies include variety in its shows and rides in the parks. In the US, only few theme parks present amusement and educational experience together, making it a good opportunity for the company to attract greater number of visitors. SeaWorld is one of the fewest companies that are interested in wildlife conservation and protection and has research facilities dedicated to wild life development. This creates an opportunity for the company to diversify its offerings and move ahead in competition (SeaWorld Parks & Entertainment, 2014b; 2014d). Presently the company is facing major threat in terms of financial risk and brand image because of documentary scandal and misrepresentation of information to shareholders. The company is going through a difficult phase in the internal and external front and require undertaking measures to mitigate these issues. Planning and budgeting concerns of the company The present condition of SeaWorld suggests that the company is unable to recover its market reputation despite its efforts. SeaWorld has invested heavily in assets, which are no longer generating sufficient return due to negative publicity. Additionally, the company is facing internal issues such mistrust among stakeholders due to falsification and misrepresentation of information regarding low attendance that is needed to be resolved tactically. The primary planning of the company should include measures for strengthening its relationship with its stakeholders by communicating the actual situation to them. The next planning that the firm required is to undertake methods for increasing the company’s sales by increasing the number of visitors. Budgeting concern of the company should include planning regarding cost cutting through reduced resource consumption. Additionally, the company need to do planning regarding its investment plans for creating better habitat facilities for Orcas. The company have to invest in advertising and public relation as well to develop strategies that can mitigate its negative publicity. Another important factor that needs consideration is objections against the company’s research activities by animal rights groups. For management of these issues, the company needs to plan appropriate public relation strategy and budget regarding that (Neely, Bourne & Adams, 2003). Future prospects of the company The financial data of the company as gathered from Value line reflects that the company has positive operational cash flow, while that from investment and financial activities are negative. It can be established that the negative publicity by CNN documentary was a big blow for the company’s market reputation and has sufficient impact on its sources of revenue. Theme park companies are capital intensive in nature as they have more fixed asset compared to current asset. The company will suffer major share of loss if it shut down its business because of the present turbulence (Value line, 2014). In context of the future prospects of the company, it is important to mention that in the history of industrial activities, a number of companies has undergone turbulent situation that affect their public image and financial position. However, these companies survived and are presently holding stable market position. A prominent example of one such company is British Petroleum that was involved in oil spill of 2010. SeaWorld is a responsible business firm, besides entertaining and educating its visitors about wildlife, it has undertaken measures for wildlife rescue, conservation and protection. The company has a strong future prospect considering its activities such as animal care and observation facility, educational and entertainment experience and wildlife rescue operations; however, for this purpose it needs to regain its stakeholders’ faith through appropriate public relation measures. Recommendation regarding future investment in the company When an organisation earn negative publicity which has a strong impact on its brand image and reputation, the factors that bother the shareholders most are if they should hold the shares of the company or they should sell them. Poor market reputation often raises question about future prospect of the company and its credibility. From the facts that have been gathered about SeaWorld, it can be ascertained that the company has lost its credibility to its shareholders due to misrepresentation of information. However, companies generally pursue such strategy to retain its shareholders; hence, possibility of good faith can be considered therein. It was further assessed that the company’s share price is slowly improving after an extreme drop in price. As the company has already assured of taking measures regarding the issues that has been raised by CNN documentary, it can be assumed that in a few month’s time the company will regain its market position. In this context, it can be recommended that shareholders, who are planning to sell their ownership, should retain certain proportions of the same. Those shareholders, who have heavily invested in the company, should re-evaluate the returns and monitor growth of the company so that they can maintain a balance between the proportion that they should sell and hold respectively. Concluding Thoughts The study about SeaWorld suggests that the company is not only involved in entertainment and educational experiences but also in researching about wildlife and its conservation. Data that has been gathered during the study suggest that the company has been enthusiastically involved in marine life rescue and rehabilitation. Alongside, it has published numerous papers and articles on protection and conservation of wildlife. The company works in collaboration with various universities all over the world so that greater degree of informative studies can be undertaken with respect to marine lives. The theme park observed declining number of visitor because of negative publicity. The company is planning to correct the issue over next three years by building appropriate habitat for killer whales and by undertaking appropriate reporting measures for its stakeholders. Keeping aside the ongoing issues, the company has growth prospects and it is important that the same nurtured for improving its earnings. Personal learning The assignment was extremely informative as it helped enhancing the author’s knowledge base regarding marine lives as an in-depth study of the company, SeaWorld and their activities was undertaken for enhancing quality of this paper. The paper also helped the author to implement the theoretical knowledge regarding finance and accounting in practical use. In this paper, a lot of analysis has been undertaken such as ratio analysis and stock analysis. These analyses were necessary to evaluate the financial position as well as overall market position of the company. The assignment further helped the author to understand the strategic development that can be observed among shareholders when a company under critical situation such as loss in brand reputation and negative growth. The author further noticed that the potential downfall of SeaWorld can act as a source of revenue to a number of law firms in the US as well as will be beneficial for the company’s competitors such as Six Flag Entertainment Corporation, Walt Disney Parks and Resorts and Universal parks and resorts. However, the overall assessment suggests that SeaWorld has the capabilities to regain its previous position in the theme park industry through appropriate public relation measures and technical developments. References Bloomberg. (2014a). SeaWorld Drops as Killer Whale Controversy Hurts Sales. Retrieved from http://www.bloomberg.com/news/2014-08-13/seaworld-slumps-29-after-revenue-profit-miss-estimates.html. Bloomberg. (2014b). SeaWorld Entertainment, Inc. (SEAS) Stock Falls Over 30% After Violations of Federal Law Are Revealed. Retrieved from http://www.bloomberg.com/article/2014-09-11/aJhcRqDTO9Fg.html. Bloomberg. (2014c). SEAS:US. Retrieved from http://www.bloomberg.com/quote/SEAS:US/chart. CNN. (2014). CNN films: Blackfish. Retrieved from http://www.cnn.com/SPECIALS/us/cnn-films-blackfish/index.html. Neely, A., Bourne, M. & Adams, C. (2003). Better budgeting or beyond budgeting? Measuring business excellence, 7(3), 22-28. Penman, S. H. (2007). Financial statement analysis and security valuation. New York: McGraw-Hill/Irwin. SeaWorld Cares. (2014a). Science and research. Retrieved from http://seaworldcares.com/en/info/conservation/science-and-research/. SeaWorld Cares. (2014b). Animal care. Retrieved from http://seaworldcares.com/en/info/animal-care/. SeaWorld Cares. (2014c). Milestones. Retrieved from http://seaworldcares.com/en/info/wildliferescue/milestones/. SeaWorld Cares. (2014d). Wildlife rescue. Retrieved from http://seaworldcares.com/en/info/wildliferescue/. SeaWorld Parks & Entertainment. (2014a). History. Retrieved from http://seaworldentertainment.com/en/who-we-are/history/. SeaWorld Parks & Entertainment. (2014b). who we are. Retrieved from http://seaworldentertainment.com/en/who-we-are/welcome/. SeaWorld Parks & Entertainment. (2014c). consumer products. Retrieved from http://seaworldentertainment.com/en/what-we-do/consumer-products/?from=Top_Nav. SeaWorld Parks & Entertainment. (2014d). Industry recognition. Retrieved from http://seaworldentertainment.com/en/who-we-are/industry-recognition/?from=Top_Nav. Vogel, H. L. (2010). Entertainment industry economics: A guide for financial analysis. Cambridge: Cambridge University Press. White, G. I., Sondhi, A. C. & Fried, D. (1994). The analysis and use of financial statements. New Jersey: Wiley. Will, I., Subramanyam, K. R. & Robert, F. H. (2001). Financial statement analysis. New York: McGraw-Hill International. Yahoo Finance. (2014a). SeaWorld Entertainment, Inc. (SEAS). Retrieved from http://finance.yahoo.com/q/mh?s=SEAS+Major+Holders. Yahoo finance. (2014b). SeaWorld Entertainment, Inc. (SEAS): Balance sheet. Retrieved from http://finance.yahoo.com/q/bs?s=SEAS+Balance+Sheet&annual. Yahoo finance. (2014c). SeaWorld Entertainment, Inc. (SEAS): Income statement. Retrieved from http://finance.yahoo.com/q/is?s=SEAS+Income+Statement&annual. Appendix Chart 1 (Source: Yahoo Finance, 2014c) Chart 2 (Yahoo Finance, 2014b) Read More