ASSIGNMENT REPORT of corporate finance 1 FINANCIAL STATEMENTS ANALYSIS OF NETFIX, INC

NATIONAL ECONOMICS UNIVERSITY

ASSIGNMENT REPORT
of
Corporate Finance 1
FINANCIAL STATEMENTS ANALYSIS
OF NETFIX, INC

Hanoi, Mar 2020

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Table of Contents
I – Introduction.................................................................................................................................... 2
1 – Purpose of the report.............................................................................................................. 2
2 – Overview..................................................................................................................................... 2
II – Analysis.......................................................................................................................................... 2
A. Balance sheet.............................................................................................................................. 2
1.

Assets....................................................................................................................................... 2

2.

Liabilities & Shareholders' Equity.................................................................................... 2

B. Income Statement.................................................................................................................... 2
C. Cash Flow.................................................................................................................................... 2
D. Financial Ratios........................................................................................................................ 2
1.

Liquidity ratios....................................................................................................................... 2

2.

Solvency ratios....................................................................................................................... 2

3.

Profitability ratios................................................................................................................. 2

4.

Acivity ratios.......................................................................................................................... 2

5.

Valuation ratios...................................................................................................................... 2

E. The DuPont system................................................................................................................. 2
III – Conclusion................................................................................................................................... 2
IV – Reference...................................................................................................................................... 2
1. Netflix, Inc.................................................................................................................................. 2
2. AMC Entertainment Holdings, Inc....................................................................................... 2
3. Lions Gate Entertainment Corp............................................................................................. 2

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I – Introduction

1 – Purpose of the report
This report discusses and analyses Netflix’s financial performance over the
past 3 years (2017-2019), with the use of financial ratios. The reason for choosing
is that Netflix is well known to many as a major streaming platform and the
company that changed traditional DVD players as the main source for movies and
TV shows into the more equipped and reliable streaming services. Finally, from
this 3-year period performance, we can figure the points in which Netflix has
excelled and the point in which they need some improvements.
2 – Overview
a. Entertainment Industry – Comunication Service Sector
Throughout the beginning of the 21st century, as our world was experiencing a
strong evolution in technology, new consumer trends were starting to expand in the
industry. Coming from an era were services in the television sector were very broad
and limited, the latest implementation of online streaming services, has since
permitted customers to benefit from a wide range of available commodities. As the
television industry faces new innovations, industry incumbents encounter new
challenges, and already established competitors are displaced. In consequence, the
online video streaming service is considered a disruptive innovation to the
conventional TV system.
b. Netflix, Inc (NFLX)
Founded

1997

HQ

Los Gatos, California

People

Reed Hastings (co-CEO, founder), Ted Sarandos (coCEO, chief content officer), Greg Peters (COO,
CPO)

Company type

Public (NASDAQ: NFLX)

IPO date

29 May 2002

Netflix was originally created as an online DVD rental service, for then
successfully establishing itself in the market for over-the-top (OTT) services. A
streaming service that provides movies and TV shows just with a touch of a
button, operates today as the biggest streaming platform in the world with over
204 million paid memberships in over 190 countries.
Netflix saw an opportunity in the 1990s of a change in the way people watch
movies and TV shows, Netflix realized that the people don’t want to go to the
store, look for a DVD player, and purchase it. They knew that the people

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would rather sit at home and watch their movies from the comfort of their
couch, something that Blockbuster did not agree with.
Blockbuster was Netflix’s competition in the 1990s, they believed that Netflix’s
theory is wrong and that people still preferred to go to the store and purchase
their movies, which later lead to the bankruptcy of Blockbuster and their
extinction. (Grace, Darothee, & Holly, 2014).

c. Competitors

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Top companies by revenue for the "Motion Pictures", 2019
Rank

Company

#1

Netlix, Inc

#2
#3
AMC Entertainment Holdings, Inc
Founded in 1920 and headquartered in Leawood, Kansas, for market-share
context - AMC is not only America’s largest theater chain by locations in the US
but the largest in the world. The company owns, operates, or has interests in
theatres. As of March 12, 2021, it operated approximately 1000 theatres and 10,700
screens in the United States and internationally.
In 2019 it became the first theater to take a stab at home entertainment by
launching on-demand movies and TV shows.
Much has already been written about the battle between Netflix and Movie
Theaters. In short, Netflix would like to premiere a movie in theaters and on its
streaming platform simultaneously, known as a “day-and-date” release. That would
increase Netflix revenues while providing flexibility for consumers to see what
they want, where they want, at a price they want.
Theaters have resisted because they feel, rightly so, that a concurrent theater

and streaming launch will cut into their business. As a safeguard, large theater
chains (including AMC) demand a 90-day window for a film to be shown in
theaters before it is available in the home. They enforce this with boycotts.
Research studies suggest that between 13% to 28% of people prefer seeing a
film the first time in theaters instead of streaming. If we use 15% on the
conservative end of this range, and apply it to 576 million people who streamed
these 5 films, it leaves us with an estimated 86.4 million people who might have
preferred to watch these movies in theaters. At an average ticket price of about
$9.16 in 2019, that’s a box office of $791.4 millions.
Lions Gate Entertainment Corp
The company was founded in 1986 and is headquartered in Santa Monica,
California. Lions Gate Entertainment Corp. engages in motion picture production
and distribution, television programming and syndication, home entertainment,
interactive ventures and games, and location-based entertainment operations in
Canada, the United States, and internationally. Lionsgate has large output and

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many subsidiaries. It’s been known to have distributed some big titles like The
Hunger Games, Saw, Kick-Ass, The Expendables, Ender’s Game, and John Wick.
With none of the Lionsgate catalog streaming on Netflix right now (at least
in the US), It was a big deal at the time leading to Netflix putting out a blog post
explaining why it was happening, said that the movies were widely available
elsewhere beyond Netflix (when they were streaming on Netflix) and that’s a
problem because Netflix tends to like exclusivity whether that’s with its Originals
or third-party contracts.
Combining Starz, one of the leading premium global streaming platforms,
with its motion picture and television studio operation, launched its independent
direct to consumer over-the-top (OTT) app Lionsgate Play in India which takes on

Netflix.
II
– Analysis
A. Balance sheet
1. Assets
There was overall an increase in total assets from $25,974,400 in 2018 to
$33,975,712. This significant increase shows the growth of assets within the
company which will aid in future economic increases.

The total current assets decreased significantly from 2018 to 2019. This is
due to the reclassification of DVD content assets from current assets to non-current
assets. This explains the decrease in current assets in 2019.
Look at these figure, we can say that Long-term asset has the biggest portion
in total assets (about 81.8% in 2019). While, Cash on Hand was kept


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fluctuating at 14% range. The above figures show that the company always ensures
a certain amount of reserve money, including the amount of cash in the fund as well
as bank deposits to meet the payment needs of customers and pay salaries for
employees of the company.
90.00%

81.80%

80.00%
70.00%

62.70%

60.00%

59.70%

50.00%
37.30%

40.00%

40.30%

30.00%
20.00%

18.20%

10.00%
0.00%

Cash: Netflix ended 2017 with approximately 2.8 million in cash. Over the
next 2 years, the company ballooned its cash position to approximately $5 billion.
This shows that the firm is holding excess cash as compared to investing the funds
in short-term investments. Unfortunately, this is not the best strategy for cash
management. Resources such as cash can lead to future economic benefit.
Accounts Receivable and Inventory: Because Netflix does not sell products
or services through other entities, the organization has no, or very little, Accounts
Receivable or inventory items.
Property plant and equipment: Netflix has steadily increased its property

plant and equipment over the last five years. The average growth rate is about 30%
annually. This indicates that the firm needs substantial property and equipment to
support its growth needs. From this assessment, investors should expect this line
item to maintain its growth rate until revenue levels off.

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Chart Title
8,000.00

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

2.

Liabilities & Shareholders' Equity

Netflix continues to have high long-term debt that is relatively consistent.


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Common-size (%)
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2019

2018

2017

The retained earnings increased in 2019 which is a positive as this can be
reinvested into the business. Finally, stockholder equity also increased in 2019. Total
stockholder equity increased from $5,238,765 in 2018 to $7,582,157 in 2019. An
increase in stockholder equity signifies an increase in assets.

B. Income Statement

(USD
million

Sales

s)
2019

20,156.4

2018

15,794.3

2017

11,692.7


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25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2019

2018

2017

Revenue increased from 2018 to 2019 which positively impacted the gross
profit. Gross profit is a measure of how efficient the company is in using resources
to deliver their service. The gross profit of 2018 was $5,826,803 and increased to
$7,716,234 in 2019. This increase in gross profit demonstrates that Netflix was
able to produce their service more efficiently in 2019 which is good for the
company financially.

As a
percentage
of revenues
Netflix
, Inc

COGS

AMC
COGS
Lions
Gate

COGS

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COGS (as apercentage of Sales)

COGS change

The increase in COGS for the year ended December 31, 2019 as compared to
the year ended December 31, 2018 was primarily due to a $1,684 million increase
in content amortization relating to our existing and new streaming content,
including more exclusive and original programming.

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2019

-149.1

An increase in net income demonstrates an increase in profitability as the
sales were greater than all expenses for that year.
C. Cash Flow
Netflix's Cash flow (2017 - 2019)
5000

4048.5

4000

3076.99

3000

2000
1000
34.33

0

-339.12

-1000-1785.95
-2000
-2680.4
-3000
-4000

Cas
Cas

Cash Flow from Financing activities – Netflix generates in Cash Flow from
financing by issueing its stock and debt.
Cash Flow from Investing Activities – Netflix Cash Flow from Investing
activities was at -$387,06 million in 2019 as compared to $34,33 million in 2017.
This was primarily due to increasing capital expenditure in the core business.
Cash flow from Operating activities – Netflix Cash Flow from Operations is
weak due to continued losses over the year. Netfix CFO was -$2887.32 million in
2019 as compared to -$1785.95 million in 2015.
=> From 2017 to 2018 there has been a drop in net change in cash but it has

increased again in the period of 2018 - 2019. The ending cash balance has made
big progress as it continued to increase every year by around 32%.
D. Financial Ratios
1. Liquidity ratios


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Ratio

Current ratio
Quick ratio
Cash ratio
Chart Title
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Netflix, Inc

Industry (median)

With its cash ratio lower than 1, we can imply that the company in 2017
didn’t have enough cash to cover its current liabilities. But Netflix did have a

quite good current ratio and quick ratio; both of 1.4 which means overall they
were able to satisfy the company’s current bills. In comparison with the average
industry’s financial ratio in U.S, Netflix was quite better off in 2017 because all
of its ratio is higher than average (the average ratio is 0.83; 1.06; 0.42
respectively).
In 2018, Netflix faced the same problems as 2017 as they did not have
enough cash to cover current liabilities of the company but overall they can still
pull it off as the current ratio and quick ratio were proven to be still good enough.
All the ratio were making a raise. Cash ratio rise from 0.52 to 0.58 while current
ratio and quick ratio both rise from 1.4 to 1.49.
Motion pictures seems to be a rising star in 2018 because all of its ratio are good.
Netflix slacked behind as its current ratio and quick ratio though seem good but
both of them is less than the average mark (1.53 and 1.91 respectively). Cash ratio
is nowhere near the average mark (0. 58 to 1.03)
2019 was not a good year for Netflix as we can see here that 2 of its ratio had
dropped drastically. Current ratio and quick ratio drop from 1.49 to 0.9; which is
quite a large amount. Cash ratio did make a raise; from 0.58 to 0.73 but didn’t
make much of a change because it still below 1 and implied that the company
didn’t have enough cash to cover its current liabilities.
In 2019 the average industry financial ratio is not in good shape either. Although
Netflix’s ratios are much worse than the recent years but compare to the average
mark, it’s still a quite decent amount. (The average mark is 0.56; 0.5 and 0.34
respectively)


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2. Solvency ratios

1. The debt to assets ratios from 2017 - 2019 of Netflix are quite constant,
being 0.3418; 0.3989; 0.4344 respectively. These figures are actually quite a
good sign because they’ve shown that company by then didn’t have much to
worry about debt ; it had the capability to pay off its debt with its available
assets and did not have much struggle meeting its obligations.
2. The debt to capital ratios from 2017 - 2019 do not vary much. Being
0.6447; 0.6642; 0.6606 respectively and with an average of 0.6565; Netflix
was quite a safe bet during that time as having lower debt to capital ratio also
means having lower risk of insolvency.
3. In the three years from 2017 to 2019, Netflix’s debt to equity ratios are all
quite high and also do not vary much. In 2017, it’s 1.8145. In 2018 it’s 1.9776
and in 2019 it’s 1.9466. It’s all quite close to 2 and this indicates that the
company it’s quite risky. In 2018 we saw an increase in the debt to equity ratio
but in dropped a little in 2019; which may indicate a good sign in the futur.In
fact in the year of 2018, Netflix has the highest debt to ratio figure in
3 years. In 2017 and 2019 the average ratios are 1.13 and 1.64 - which in my
opinion still indicates quite a safe bet while Netflix struggle to maintain its
figure below 2.0.
3.

Profitability ratios

3.1. Profit margin
Netflix had lower profit margin than median industry ratios in 2017. Its profit
margin increased yearly and surpassed average industry ratios in 2019 which is a
good signal for them. Lions Gate and AMC had higher ratios than either Netflix
and Industry ratios.

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70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

Netflix

Lions Gate

AMC

2019

2018

Industry ratios
2017

3.2.
margin

Netflix

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Lions Gate
AMC
Industry ratios
(Median)
Netflix had the highest operating margin compare with Lions Gate, AMC,
and Industry ratio in 3 years. It means that the company is efficient in its operations
and is good at turning sales into profits.
Chart Title

3.3. Basic Earning Power (BEP)

Netflix
Lions Gate
AMC

Netflix’s BEP increased steadily and was the highest one in those three
companies. Netflix is more efficient at generating income from its assets. On the
other hand, Lions Gate and AMC’s BEP have not been stable over time.


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Chart Title
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%

Netflix

Lions Gate

2019

2018

AMC
2017

3.4. Return on Equity (ROE)

Netflix
Lions Gate
AMC
Industry ratios

(Average)
Netflix had the highest ROE in three years and grew annually. It may provide that
the company management is good at generating shareholder value because it
knows how to reinvest its earnings wisely, so as to increase productivity and
profits.

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Chart Title
40.00%
20.00%
0.00%
Gate

-20.00%

Lions

-40.00%
-60.00%
-80.00%
-100.00%

2019

2018

2017

3.5. Return on Assets (ROA)

Netflix
Lions Gate
AMC
Industry ratios
(Median)
On general, although ROA of Entertainment Industry was quite low, Netflix still
had a positive ROA and increased in the next year. It may seem that the business
was more profitable and efficient.

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Chart Title
10.00%
5.00%
0.00%
Gate

-5.00%

Lions

-10.00%
-15.00%
-20.00%
-25.00%
-30.00%
-35.00%

-40.00%

4.

2019

2018

2017

Acivity ratios

4.1. Fixed Assets Turnover (FAT)

Netflix
Lions Gate
AMC

Even though Netflix’s FAT decreased overtime, it was still higher than Lions Gate
and AMC. A declining ratio may also suggest that the company is over-investing in
its fixed assets.
Chart Title
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

Netflix

Lions Gate

2019

2018

AMC
2017

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