Financial Statement Analysis

Below is an analysis of the amount of revenue that Netflix was able to collect from 2014 to 2018 based on its income statement.

Figure: Netflix’s Revenue from 2014 to 2018

According to the graph, it is clear that for the five years period, Netflix has been having an increasing amount of revenue.  The revenue is inclusive of tax they collected from their customers, which was assessed by the government authority. The figure also illustrates an increase in operating cost for the five year period. In addition, there has been an increasing trend in net income and income before income tax for the five year period. 

Due to the increased net income, the comprehensive income of Netflix has been increasing. The net income of the company increased from 558,929 in 2017 to 1,211,242 in 2018. This results in a comprehensive income of 1,212,217 in 2018 from 586,937 in 2017. Armour, Burkhauser, and Larrimore (2013) define a comprehensive income as the amount of income, which can be a decrease, increase, or tax from equity following transactions and other circumstances and events from net income. This is an indication that the stakeholders’ equity in Netflix has continuously enjoyed some benefits.

According to the cash flows statement, we will explore net cash used in operating activities, net cash used in investing activities, and net cash provided by financing activities. This is presented in the figure below.

Figure: Consolidated Statements of Cash Flows of Netflix Inc.

Based on the above figure, it is evident that Netflix has had reducing net cash provided by (used in) operating activities from 2015 to 2018. There was a reduction of cash (used in) provided by investing activities in the company. However, the company enjoyed increasing net cash provided by financing activities. In 2018, the amount of cash (used in) provided by investing activities was (339,120), that used in net cash provided by financing activities was 4,048,527, while that on net cash provided by (used in) operating activities was (2,680,479).

Current ratio: This is a measure that identifies whether an organization is in a position to pay short-term obligations. The current ratio is calculated by dividing current assets by current liabilities where Netflix from 2009 has been experiencing a current ratio of more than 1. This is an indication that Netflix is able to meet its short-term obligation. Between 2015 and 2017, the current ratio was reducing indicating there was an increase in liabilities but from 2017 to 2018 the ratio increased. 

Netflix Risks

A beta analysis is identified as one of the critical measures of equity market volatility. Delen, Kuzey, and Uyar (2013) explain that beta is an asset sensitivity or elasticity to market.  In Netflix, a Beta analysis will help to illustrate the relationship of the financial market where it trades. 

Beta is calculated as = Covariance/variance

The beta coefficient for the company is 1.35, for the industry 0.99 and for the sector was 1.14. Delen, Kuzey, and Uyar (2013) explain that a Beta greater than 1 is an indication that the stock will rise more than the market and reduce more than the market. On the other hand, a beta that is less than 1 is an indication that an increase in the market means there is a less rise in the market.  Having a Beta of more than 1 means that Netflix has a higher volatility than the market’s volatility. The beta of 1.4 illustrates a 40% security price more than the market. The co-efficient illustrates that Netflix faces systematic risks, which is an indication that the entire market is declining. If Netflix faces a systematic risk like a financial crisis that occurred in 2008, investors will be at risk as no form of diversification will prevent them from losing their investments. According to Delen, Kuzey, and Uyar (2013), systematic risk is termed as un-diversifiable risk.

It is critical to understand that there is a direct correlation between price activity and the market. It is not possible to detect unsystematic risk. In addition, if Netflix adds the investor’s stocks to the portfolio it will not add risks to the portfolio and will not increase the likelihood of attaining more returns from the portfolio. Another way is that having a beta of 1.0 means that adding a portfolio to the stock increases the risk of the portfolio and expected returns. 

Currently, Netflix has a three times Price-to-Earnings multiple of 268 in comparison to that of its competitors; Warner, Time, and Disney. This exposes Netflix to too much predictable aggregate industry growth. Allen, Feils, and Disbrow (2014) explain that international business for Netflix may face fierce competition in comparison to that at home because international subscribers are unlikely to subscribe to multiple subscription services. 

Recommendation to Investors

The high increase in net income for Netflix is appealing to many investors. However, before investing in the company, potential investors should consider some of the risks associated with the business.  One aspect to consider is that although Netflix faces stiff competition, it has been able to beat the majority of its investors through innovations. Allen, Feils, and Disbrow (2014) explain that Netflix seeks to deliver and innovate faster in comparison to the majority of its competitors, which has made it a market leader rivaled by only a few competitors. Some of its rivals include Hulu, Vudu, Amazon, CBS, HBO and on the streaming, Verizon, and Comcast.  

Although it is challenging to determine the fluctuations of the market share for the company, financial analysts argue that there is a possibility for Netflix to offer an equal amount of risk and benefit. There is a likelihood to increase aggressively their market share both in the U.S., as well as in the global market. The company’s leadership will be maintained based on its reputation and innovation. Before 2017, Netflix had an average of a five year beta of 0.98 (Larcker and Tayan, 2018), which indicates that Netflix in comparison to its competitors is less volatile. This introduces a muted movement of stocks both the upside and downside in regard to fluctuations in the market conditions, while the general market movement is faster.  Netflix beta provides an implication that investors containing a high beta portfolio may fight it in case they desire to reduce market risk, particularly during downturn economies. 

Although Netflix experiences a lower level of relative risk, financial analysts argue that Netflix is at a basket with established companies due to its market capitalization of US$142.81B. Additionally, Netflix operates largely on the online retail industry, which according to Sec gov. (2018) is highly prone to market-wide shocks. The revenue growth of Netflix has increased tremendously with approximate 8.0% while in the same quarter, revenue increased by 22.2%. Due to this increase, the earnings per share have increased making it a potential stock market. In 2018, Sec gov. (2018) explains that the stock has surged by 240.25% due to its strong earnings growth of 300.00%, as well as other influencing factors.  This rise outperformed the increase of the S&P 500 Index during the same year. However, Leyda (2018) explains that it is not recommendable for investors to invest based on the hold rating irrespective of the gains experienced in 2018.

Although Netflix has enjoyed increased earnings per share improvement, Larcker and Tayan (2018) explain that it is likely for the company to be poised for EPS growth in 2019. The debt to equity slightly declined in 2018 and was recorded as 0.42, which is low. However, Leyda (2018) suggests that although this ratio is low, it is higher in comparison to the industry average. This is an indication that there is a need to evaluate the debt levels as it indicates weak liquidity. The return on equity of the company slightly declined in 2018, which is an indication of weaknesses in the organization. In comparison to other organizations in the Internet & Catalog Retail industry and the market at large, Netflix demonstrated a lower return on equity both in the S&P 500 and industry average.

References

 Allen, G., Feils, D., & Disbrow, H. (2014). The rise and fall of Netflix: what happened and where will it go from here?. Journal of the International Academy for Case Studies, 20(1), 135-143.

Armour, P., Burkhauser, R. V., & Larrimore, J. (2013). Deconstructing income and income inequality measures: A crosswalk from market income to comprehensive income. American Economic Review, 103(3), 173-77.

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.

Larcker, D. F., & Tayan, B. (2018). Netflix Approach to Governance: Genuine Transparency with the Board.

Leyda, J. (2018). Financial Times: Economic and Industrial Temporalities in Netflix’s Arrested Development. Television & New Media, 19(4), 345-360.

Sec gov. (2018). UNITED STATES SECURITIES AND EXCHANGE COMMISSION. 10-K Report. [online] Available at: https://www.sec.gov/Archives/edgar/data/1065280/000106528018000069/q4nflx201810k.htm [Accessed 30 Apr. 2019].