Netflix Company Analysis

Organizational Context Netflix is an entertainment company based in the United States that specializes on online on-demand streaming video, in addition to a DVD-by-mail service in America. The organization was founded in Scotts Valley in 1997 and two years later began its prevailing consumer subscription model. In the present day, Netflix’s consumer base comprises of more than 117 million subscribers in 190 nations across the world. Netflix are a forerunner in the internet delivery of television shows and movies, unveiling their streaming services in the 2007 financial years.

From that point onwards, the company has developed an ecosystem for internet linked screens and have also brought in progressively more amounts of content that facilitate consumers to enjoy television shows and movies directly on their screens that are connected to the internet. Owing to these significant endeavors, Netflix has been able to experience increasing consumer acceptance of, and vesting in, the delivery of television shows and movies directly over the internet (Netflix, 2018).

The business operations of Netflix are categorized into three different segments including Domestic streaming, International streaming, and Domestic DVD. First of all, the domestic streaming business segment generates revenues from membership fees for a monthly basis for services that comprise of solely streaming content to their members in America. Secondly, the international streaming business segment generates revenues from membership fees on a monthly basis for services that comprise of only streaming content to their members or subscribers that reside outside of the United States.

Lastly, the Domestic DVD business segment generates revenues from membership fees on a monthly basis for services that comprise of only DVD by mail (Netflix, 2018). In the 2011 financial year, Netflix transformed its business model by increasing its original content and making major investments in its own original series. Some of the renowned television series that have been successful comprise of House of Cards and Orange is the New Black.

Furthermore, in 2017, the corporation started an aggressive venture into the production of feature films, with the main objective of unveiling numerous films. Different from conventional broadcasters, the main objective of Netflix is not to be attractive to as extensive an audience as conceivable but instead to cater to niches and efficaciously give every portion of the populace to a television show or a movie they are unable to live without.

The key strategy that Netflix employs to provide consumers with these product offerings is by growing their streaming membership business internationally within the parameters of their profit margin targets. The company is incessantly enhancing the experience of their members through the expansion of their streaming content with an emphasis on a programming amalgamation of content that fascinates and exhilarates their members. What is more, Netflix are incessantly improving their use interface and protracting their streaming services to an increasingly higher number of screens that are connected to the internet.

This has made it possible for the subscribers to be able to download a variety of titles that can be viewed when offline. Most of all, Netflix continues to grow and develop their streaming services not only locally but also globally (Netflix, 2018). Recent Financial Performance Consolidated Income Statement Analysis The income statement is a financial statement that demonstrates the revenue generated, the expenses incurred and the resulting profit or losses of an entity for a particular time period.

These financial statements are fashioned for managers within the entity to report the financial status of business operations in the course of the financial year. The income statement divulges how profitable an entity is and whether there is the expectation of financial growth and profitability in the future. It reveals to the external stakeholders whether investments in such an entity will generate positive earnings and also if the entity has the ability to recompense its loans (Weygandt, Kimmel, & Kieso, 2009).

The assessment of the income statement of Netflix for the past three years indicates that the company’s financial performance has gradually improved in this particular time period. To begin with, the total revenues generated by the company in the past three years have remarkably improved. Notably, the total revenue of Netflix increased from $2.19 billion in 2015 to $2.8 billion in 2016 and further up to $4.03 billion in 2017.

This is illustrated in the chart below: In line with the rise in revenues for the company, there was a progressive increase in the cost of goods sold. The cost of revenue of the company increased from $4.6 billion in 2015 to $6.02 billion in 2016 and further up to $7.66 billion in 2017. However, the revenues generated by the company were significantly high. In this regard, Netflix generated gross profit increasing from $2.19 billion in 2015 to $4.03 billion in 2017. In the past financial year, Netflix experienced a 44.03 percent increase.

The indirect costs of Netflix comprise of different items such as general and administrative costs, marketing costs, as well as technology and development costs. These are the outlays that are spread across the corporation’s revenue. In the past three years, the indirect costs of the company have been increasing with the biggest chunk being the selling and administrative expenses. Imperatively, subtracting the indirect costs of the company from the gross margin of the company brings about the operating income.

The operating income of Netflix significantly increased from $305.8 million in 2015 to $379.8 million in 2016 and further up to $838.7 million in 2017. The net income delineates the profit generated by a corporation subsequent to paying off all of its costs. The net income of Netflix gradually increased in the past year from $122.64 million in 2015 to $186.68 million in 2016 and further up to $558.93 million in 2017. Shareholders take into consideration this particular amount as it delineates the returns that they may obtain from the company in terms of dividends.

In addition, other stakeholders such as investors examine the net income as it portrays the direction that the company is headed. The gradual increase in the net income of the corporations is a key indicator of the profitability of Netflix in the past three years and its positive and remarkable financial performance of the organization.

The chart below illustrates the net income of Netflix in the three year period between 2015 and 2017: The statement of cash flows is a financial statement that depicts the way in which an entity’s operating, investing, and financing activities have influenced cash in the course of a certain period. In this financial statement, cash is deemed to take into account both cash and cash equivalents.

In particular, the statement of cash flows provides users with data and information regarding an entity’s cash incomes and cash disbursements in the course of a period of time, as well as, the entity’s investing, operating and financing activities. With reference to financial management, the financial statement plays a key role of appraising liquidity levels, establishing the prevailing dividend policy and scheduling investment and financing activities (Weygandt et al., 2009). One of the outstanding items on the cash flow statement is the cash flow from operating activities.

This lays emphasis on the cash inflows and outflows from a corporation’s business activities of buying and selling merchandise, providing services. The cash flow from operating activities for Netflix gradually declined in the past three years from -$749.4 million in 2015 to -$1.47 billion in 2016 and further down to -$1.79 billion in 2017. Another perceptible item in the cash flow statement is the cash flow from investing activities.

Imperatively, this is an item in the financial statement that reports the aggregate change in a corporation's cash position resultant from investment gains or losses and changes resultant from amounts spent on investments in capital assets, for instance plant and equipment. The cash flow from investing activities for Netflix significantly increased in the past three years from -$179.2 million to $49.77 million and slightly declined to $34.33 million. A third item of the cash flow statement is the total cash flows from financing activities.

Imperatively, this is a category in a corporation’s financial statement that accounts for external activities that enable an entity to raise capital. Aside from raising capital, financing activities also comprise of repayment made to investors, addition or changing of loans and the issuance of additional stock. The total cash flows from financing activities for Netflix substantially increased in the past three financial years. This figure declined from $1.64 billion in 2015 to $1.09 in 2016 but went on to remarkably increase to $3.08 billion in 2017.

This is associated to the increase in net borrowings, which increased threefold from $1 billion in 2016 to $3.02 billion in 2017. Organization’s Underlying Financial Performance Netflix has had a remarkable financial performance not only in the past year but gradually in the past three financial years. As can be perceived from the income statement and also from the graphs, the revenues and net income of the company have gradually increased from 2015 to 2017. This indicates the positive profitability of the company and its positive financial performance in the market.

Netflix has been thriving in terms of financial performance compared to its market rivals. In addition, the stock price of the company has quadrupled in the past three years, which indicates the growth of the company and the bright future ahead. Current Financial Health Capitalization of the Organization The manner in which an organization is capitalized takes into account its financial leverage. In delineation, financial leverage is the magnitude to which a corporation utilizes fixed-income securities, for instance, debt and shareholders’ equity.

Imperatively, when a corporation utilizes more debt financing, it implies that it has higher financial leverage (Milling, 2003). The inference of a high magnitude of financial leverage is that there are high interest payments, which have a negative impact on the corporation’s profits (Wahlen, Baginski and Bradshaw, 2014). Netflix is capitalized though debt. Based on the financial statements of the corporation, for the past three years, Netflix has had considerably greater amounts of debt compared to shareholders’ equity.

The total debt of the company increased from $7.98 billion in 2015 to $10.91 billion in 2016 and further up to $15.43 billion in 2017. On the other hand, the shareholders’ equity of the corporation increased from $2.22 billion in 2015 to $2.68 billion in 2016 and further up to $3.58 billion in 2017. The debt to equity ratio is employed in the evaluation of a corporation’s financial leverage.

The table below indicates the debt to equity ratio of Netflix for the past four financial years: As illustrated, the debt to equity ratio of the company has gradually increased in the three year period from 3.58 in 2015 to 4.07 in 2016 and further up to 4.31 in 2017. In general, this indicates that Netflix is capitalized by debt. In regard to the financial health of Netflix, the increasing debt to equity ratio is linked with high level of risk and that the corporation has been significantly aggressive in financing its growth with debt.

The liquidity of a company determines whether an organization has enough cash to cater for payroll and other liabilities. The table below indicates the current ratio of Netflix for the past three years. The current ratio is computed using the formula that is by dividing the current assets by the current liabilities. The current ratios of the company for the past three years are computed as follows: This is a metric that is utilized in measuring a corporation’s ability to pay short-term and long-term obligations.

The current ratio of Netflix increased from 0.88 in 2015 to 1.25 in 2016 and further up to 1.40 in 2017. The increasing current ratio indicates that Netflix is able to cater for its short-term obligations in a financial year. This indicates that the financial health of the organization has gradually improved in the past three years. The inference of this is that Netflix is more than capable of paying its short-term debts with its current assets.

One of the key strengths of the company is its current ratio which implies that it has a higher liquidity level. This means that.