This article aims to evaluate the financial performance of Netflix company, make comparisons of the findings of the company and those of competitors within the industry, and examine its effect on the stock. To attain this, ratio analysis, Dupont, common size statement, and trend will be performed to determine the company’s performance over the past few years. Netflix Inc. is an internet streaming company which offers entertainment services through internet subscription of streaming television episodes and movies as well as sending DVDs to its customers through mails. The company generates revenue from monthly service membership charges comprising exclusively of streaming contents to its customers in the United States of America and from other members outside the US (Adhikari et al., 2014).  Netflix Inc. was founded by Wilmot Reed Hastings Jr. and Marc Randolph in 1997 and its headquarters is located in Los Gatos, CA. When the company first started in 1997, they were making distributions of DVDs through snail mail. In the process of distribution, Netflix approached some media conglomerates describing their desires to purchase the licenses for older television programs and movies. As a result, the consumers had the opportunity to request titles from the company that was not found in the home-grown video stores. On the other hand, studios were able to double their revenues from the sales (Adhikari et al., 2014). The company faces competition mainly from Fox, Disney, Viacom CBS among others.

Common size balance sheet

Table 1: Netflix Inc Common size of the balance sheet (source: MarketWatch, 2020)

Figure 1: Netflix Inc. Common size bar graph 2015-2019

The results from the above findings indicate a decrease in cash and short-term investment from 22.65% in 2015 and 12.76% in 2016, then increase to 14.85% in 2017 and another decrease is observed in 2018 to 14.61% and then increase to 14.77% in 2019. Although the value may not be reasonable to some extent, it shows that the company’s financial position is not strong and might not have the ability to invest surplus cash in bonds, stock, and equivalents to produce larger interest as compared to interest earned from usual savings. The ratio of total liabilities to total assets illustrates the percentage of assets of a company that are funded through debts (Rakićević et all., 2016). From the above results, the ratio is higher than 50 percent which indicates that several Netflix Inc. assets are funded through debt. The suitable ratio of debt must be 60 percent and below to make sure that the company will not face challenges while accessing loans. As well, from the above findings, the equity to asset ratio has been maintained that for the past five years. The values of the ratio ranged from 18.84% to 22.34%, which indicates that most of the assets of the company have been collected by debt. The above-indicated ratios have shown little variation in the length of five years and might be a good indication of stability in the company. However, when the ratio of liabilities to assets is less than 100%, it means the company consists of good financial strength and high liquidity which is sufficient for the company to pay its liabilities by using its assets.

Trend Analysis

Table 2: Growth metrics of Netflix Inc. (source: MarketWatch, 2020)

Figure 2: Netflix trend anallyis chart

As from the trend chart above, it can be seen that the sales increased by 30.26% in 2016, 32.41% in 2017, and 35.08% in 2018, but in 2019 the sales decreased to 27.62%. This might not sound good to the business, since it is the expectation of every company to ensure there is a progressive increase in sales. A fall in the sales of a company directly affects the net profit. As indicated in the above findings, the growth of gross income slightly varied in the five years. This variation indicates that the company uncovered the efficiencies during the period. From the above finding, the variation in the growth of cost of sales in 2016, 2017 and 2018, and 2019 is slight. This is a good indicator for the company regarding decision making on budgeting. The net income results above display low volatility due to the high increase in net income from 52.22% in 2016 to 199.41% in 2017, but high volatility is observed in 2018 by 82.7 decrease in net income and 2019 by 63.58 net income decrease. This may not be an important gesture in the company because high volatility indicates instability of business and may discourage investors from investing in the company. The net income shows the profitability of the business; therefore, high volatility might result in differences in dividends and retained earnings. Also, from the above finding, the interest expenses it is observed to have increased in 2016,2017, and 2018 significantly, then decreased in 2019. Therefore, an indication that the company effectively managed its borrowings in 2019 compared to the previous years.

The observation from the above overall results of trend analysis realizes that the growth of net income is not stable, with variations in interest expense playing a huge role in creating the net income instability. Also, stability in gross income growth exhibits that there was a slight variation in the cost of sales in the last five years. The cost of sales stability is vital in that it assists the business to maintain its brand's market prices and boost the financial health of the company.

Ratio analysis

Table 3:Financial ratios of Netflix Inc.  (source: MarketWatch, 2020)

1. The current and quick ratio

The metrics of current ratio measures the capability of the company to settle down its current obligations by the use of current assets, therefore a larger current ratio value indicates high liquidity in the company. The observations from the above findings, the current ratio decreased from 0.65 in 2015 to 0.38 in 2016, then increased significantly in 2016 to 0.52,0.58, 0.87 in 2017,2018, and 2019 respectively. However, the company had a higher current ratio is 2019, which means the company had no challenges while meeting its liabilities. Although for the last five years, the company's current ratio was below 1 an indication that the company experienced difficulties in paying its liabilities with generating sales from its inventory. Also, from observation the quick ratio of the company dropped between 2015 and 2016, then increased in 2017 and 2018, however in 2019 it decreased further. The indicates that the company relied more on inventory in 2016 and 2019, a condition which discourages investors, but in 2017 and 2018 the company relied less on inventory.

1. Days Payables Ratio

The days payable ratio indicates the average time that the business may take before paying trade creditor its payments. The company that has higher days payable value may take a much longer time to its fees. From the findings above, the days payable ratio was higher in 2015 by 18.39 and 2019 by 18.03, which indicates that the company was able to retain the existing funds for a longer period in the two years. As well, during 2015 and 2019 the company had the capability of utilizing the funds for maximum benefit. As well, the high days payable may indicate the company was not able to make the payment, serving as a red flag to the creditors.

1. Net margin ratio

The net margin ratio explains how much of every dollar in sales collected transforms into profit. This ratio is among the most essential indicators of the financial strength of the company. From the above observations, there was a significant increase in net margin ratio in the last five years of the company, therefore an indication that the practices employed in the company are working. The ratio also indicates the has been consistent profitability in the company for the past five years.

1. Return on Asset (ROA) ratio

The ROA metric determines the ability of a company to efficiently produce a profit from its asset (Rakićević et all., 2016). This ratio helps investors to obtain good opportunities for stock business. As per the findings, the company’s ROA ratio increased over the last five years, which indicates that the company is doing a tremendous job of growing its profit with the investment dollar it uses.

1. Return on Equity (ROE)

The ratio evaluates the profitability of a company regarding the equity of stockholders. The ROE is an essential metric to the stakeholders in matters concerning investment decisions. From the observation of results, it is realized that over the past five years the company’s ROE has been increasing, which indicates that the company has been increasing its generation of profit with requiring more capital.

1. Gross margin ratio

The gross margin is a percentage representation of a firm’s sales that produced a profit. The results above show that the gross margin ratio dropped 2016 to 29.14 from 32.29 in 2015, however in 2017,2018 and 2019 there was a consistent increase by 31.30%,36.89%, and 38.28 respectively, this indicates that the company has been making a reasonable profit on revenue, provided it kept overhead cost in control.

1. Return on Invested Capital (ROIC)

This ratio measures the company’s efficiency at distributing the capital under its regulation to investment which is profitable. From the findings, over the five years ROIC increased, this indicates, the company is good at creating its shareholder wealth.

Evaluation of Return on Equity (Dupont Analysis)

Table 4: Three-step DuPont analysis (source: Morningstar, 2020)

 The main goal of Dupont analysis is to evaluate how losses or profits are being produced by a company. From this, the firm will have the ability to distinguish the factors that are affecting or sustaining its operations. As observed, the company’s ROE ratio was high in 2018 by 77.01%, this was majorly attributed due to the high profitability displayed by 10.01% net margin in comparison to that of 2017 and 2017 which was 7.64% and 8.74% respectively.

The inventory turnover evaluates the speed at which inventory affects the company and its efficiency in sales production. A high rate of inventory turnover indicates greater efficiency. The ROE of the firm has remained stable over the last five years, but the financial leverage increased from 6.31in 2017 to 7.77 in 2019, an indication that the risk ability of the company to pay its debt has decreased over the last five years. In addition to growth in the company’s financial leverage, the company did not use external resources to a substantial level. The ROE maintained between 40.01% and 77.01%., which exhibits that the company deployed its shareholders capital effectively.

Table 5: Dupont analysis for Competitors companies (source: Morningstar, 2020)

From the comparison ROE Dupont analysis of competitors, it is clear that Netflix is doing better among its competitors. For example, Fox recorded 22.59%, while Disney recorded 32.03% and Viacom CBS recorded 44.41%  ROE  which was less compared to 60.42% recorded by Netflix in 2019. Also, the turnover of Netflix was good but less net margin compared to Disney and Viacom CBS. Thus, Netflix will be required to improve on its net margin to ensure the company is profitable without additional risks of failure.

Recommendations and Conclusion

From, the ratio analysis and Dupont analysis computational findings of Netflix over the last five years, it can be concluded that currently, the firm might be suitable for investors. The liquidity ratios of the company indicate that the company has been operating well financially for the past five years. Likewise, the operating performance ratios show the company’s performance has grown over the past five years. This is due to the company efficiently deploying resources at its disposal. Additionally, the debt to asset ratio relationship indicates a negative result. This shows that Netflix's cash level operation is not satisfactory strength to cover all of its obligations. The common-size and trend analysis, on the other hand, shows that the company cash and short-term investment has been decreasing over the past five, therefore the company should ensure there is an increase in cash-short term investment. Lastly, fluctuations in Netflix's profitability show that the company is inappropriately using its assets in producing revenue. Thus, it is recommendable for the company to re-engineer the strategies of information processing and go-to-market to ensure sales are not affected by small sales or little demand.

References

Adhikari, V. K., Guo, Y., Hao, F., Hilt, V., Zhang, Z. L., Varvello, M., & Steiner, M. (2014). Measurement study of Netflix, Hulu, and a tale of three CDNs. IEEE/ACM Transactions on Networking, 23(6), 1984-1997.

Rakićević, A., Milošević, P., Petrović, B., & Radojević, D. G. (2016). DuPont financial ratio analysis using logical aggregation. In Soft computing applications (pp. 727-739). Springer, Cham.

MarketWatch, (2020)  Netflix Inc., Marketwatch.com. Retrieved 21 September 2020, from

https://www.marketwatch.com/investing/stock/nflx/financials.

Morningstar, (2020) Netflix  Inc., Morningstar.com. Retrieved 21 September 2020, from

https://www.morningstar.com/stocks/xnas/nflx/performance