Netflix Analysis

Introduction

        Established in 1997, Netflix is an American global provider of streaming films and television series and operates in three segments: Domestic streaming, International streaming and Domestic DVD. Netflix initiated an initial public offering (IPO) on May 29, 2002. By fully incorporating the internet into its operations, Netflix offers various ways of video streaming to subscribers and generates revenues through the monthly membership fees for its content streaming services and DVD-by-mail services. As of April 2016, Netflix reported over 81 million subscribers worldwide, including more than 46 million in the U.S, now serves over 190 countries, Netflix is the world’s leading Internet television network and has been one of the most successful dot-com ventures.

Analysis

Balance sheet and Income Statement

        Have an overlook from balance sheet, first we can see that NETFLIX has raised asset with great number. The total asset in 2015 (10,202,871 millions)  is almost double its number in 2013. It seems that NETFLIX has a steady development through 3 years. In a closer look, while cash in 2015 is almost 3 times of cash in 2013, the net working capital also rises constantly. Moreover, the total asset gains because of the impressive raise of intangible asset. Its number in 2015 is more than double of 2013. We can see that the company is focusing on a huge development project. It seems that the company is having a big effort on expanding their asset and also improving the quality of their products and services.
        The increase of cash come from the finance activities of the company. Look to the right side, both common stock and long term debt have a big jump. Not only having more money from the stockholders, the company also make some big loans. Comparing with the year of 2013, long term debt has increased over 4 times in millions and about 14 percentage of total asset, while the amount of money from common stock is not so impressive. In 2015, total liabilities reach the number of 78.21% of total assets, while equity has a 6% drop from previous year. The debt to equity ratio has raised from 2.79 in 2014 to 3.59 in 2015. It can be seen that the company is raising their asset, specifically their cash, by getting money from stockholder and also creating some loans. NETFLIX is using financial leverage due to the raise of debt, but it seems that there is an unbalance in this finance activities. The long term debt gained to a high level and the company may have to face with risks because of the unbalance between liabilities and equity. The big jump of total liabilities will create some problems, because the disequilibrium between debt and equity certainly make the financial leverage become less efficient. On the other hand, while percentage (of total asset) of current asset and liability both go down, the liquid ratio rises steadily that means the capability of solvency has been improved. It may help Netflix in the future to solve the high level of long term debt.

        The income statement's purpose is to provide investors the most accurate description of the company's profitability over 3 years (from 2013 to 2015). Revenue is the money that Netflix sells their products. As can be seen from the table, there was a steadily increase in Netflix’s revenue from 2013 to 2015, however; it does not mean that the company work profitably or not. In order to know that, we should study more about cost of revenue. In the common size table, it is easy to see that the percentage of cost of revenue tends to be drop from 71.26 % to 67.73%, which means that the company get savings cost. In terms of gross profit, we find a positive signal in increasing from 28.74% to 32.27%. The year of 2014 is great with Netflix while almost positive index go up, especially net income. The net come of 2014 increase from 2.57% (of revenue) to 4.85%, but the suddenly go down to 1.81% in the next year. This dramatic scene come from the rise in operating expense. To grow profit, Netflix tried to develop and expand the scale of the company by investing in research development and selling general and administrative. It is inevitable that when doing business all companies want to get. There was a significant fall of $96,822 in operating income or loss from 2014 to 2015, which is a worth signal to consider unstable profitability. However, before borrowing a lot to expand led to interest expense also rose strongly from $29,142 in 2013 to $132,716 in 2015. The interest expense has jump up over 3.5 times and that explains the decrease in net income from 2.57 % to 1.81 %. It can be seen that investment is accepted risks to invest and can be faced with an imbalance.

Ratio analysis

1. Growth rate analysis

During the last three years from 2013 to 2015 , Netflix Inc. has done a good job at keeping their customers entertained, therefore the company’s size has been increasing gradually. The firm’s sales is always increasing throughout the years, which is a positive sign of a healthy firm. The company’s sales is increase about 20% to 25% compare to the previous year, that is very impressive. 2013’s income was amazingly rose up to 555.33%.

However, it seems like Netflix Inc.’s income was decreasing since 2014’s income growth was 137.36% and it is even worst in 2015 when their income was decrease 54.03% compare to 2014. This event happened because the firm has invested their capital in many operating activities, thus the expenses and interest payable are also increase. On the bright side, these investments help Netflix Inc. to boost their assets growth rate year by year. To be more specific, inn 2013 and 2014, their assets growth rate was about 30% to 36% and 2015 was the most impressive one with the increase of 44.88%.

1. Liquid ratios analysis

In this part, our primary concern is the firm’s ability to pay its bills over the short-run without undue stress. As a result, these ratios will focus on current assets and current liabilities.

Netflix Inc.’s current ratio is going up every year and its current assets always larger than current liabilities. This is a good sign which indicates that the firm can always pays its debts or expenses and still keep the company growing since its liabilities are always covered more than 1.4 times over.

Netflix Inc.’s cash ratio has increasing year by year, but it is always less than 1, which means there are more current liabilities than cash and cash equivalents. In this situation, Netflix Inc. might be having a financial difficulty since this firm has insufficient cash on hand to pay off short-term debts. On the other hand, a low cash ratio may be an indicator of its strategy to maintain a low cash reserves.