Netflix, Inc.’s Financial Performance and Health Analysis

Netflix, Inc. is the chosen company for this financial performance and health analysis final project. Netflix is a streaming entertainment services company instituted in 1997 by American entrepreneurs Marc Randolph and Reed hasting. It offers subscription service, streaming movies and TV episodes through internet services. It also creates original programming. 

Organizational Context of Netflix, Inc. 

Key Goods and Services of Netflix 

Netflix, Inc. operates in Tech & Entertainment, mass media industry and provides a variety of products and services to its consumers from all over the world. The company's main products are streaming media, television episodes over the internet and DVD rental by email, brand licensing, and product replacement advertising. Its streaming products are categorized as domestic streaming, international streaming and domestic Digital Versatile Disc (DVD) ( Anderson, 2019) . Netflix’s main services include film production, film distribution and television production. 

Netflix offers quality products and services to online subscribers aged 18-49 years who watch television shows and episodes. Currently, the company has approximately 167.1 million active accounts globally, of which 61 million accounts are registered in the United States ( Anderson, 2019 . The increased use of online services and technology to run human activities has boosted the company’s business activities over the past two decades. 

Organization and Management of Netflix, Inc. 

Netflix aims to provide quality products and services that meet its customer demands at affordable prices. The company is achieving its goal by identifying the best movies that are more appealing to their customers to attract more subscribers and increase its market share in the industry ( Anderson, 2019) . Netflix has a hierarchical organization structure with adjustments that enhances business flexibility and receptiveness to international market fluctuations. Through organizational structure, Netflix has consistently evolve to provide quality entertainment content and high on-demand media online and streaming service to attract targeted consumers from different countries ( Anderson, 2019) . The company’s corporate structure enhances flexibility in running organizational activities and decision-making process. Despite the company having multiple subsidiaries branches in different countries, its corporate structure promotes accounting activities. The subsidiary branches of Netflix from the 190 countries individually record and report all their transactions and financial performance to the headquarters as required by the Generally Accepted Accounting Principles. 

Recent Financial Performance of Netflix, Inc. 

Consolidated Income Statement 

According to Netflix's consolidated income statement for the last three years, the company has been performing well. Its annual revenue has significantly increased from 2016 to 2019. The increase in the company's annual revenues is attributed to a rapid rise in customers subscribing to Netflix's online services and products. For instance, the company reported total revenue of $ 11,692,713 in 2017 and $ 15,794,341 in 2018 that translates to 35.1% increase. Subsequently, the company reported total revenue of $ 20,156,447 in 2019 that translates to 27.62% increase from the previous year (Yahoo Finance, 2020). 

Besides, company’s operating income also increased significantly in the last three years. The cause of an increase was due to a rise in annual sales revenue of the company. The decline in percentage increase in its operating expenses is another cause of the rise in Netflix's operating income. For example, Netflix reported a 32.2% increase in operating expenses in 2018; but, value decreased to 21.09% in 2019 (Yahoo Finance, 2020). The change implies that the company reduced its operating expenses in 2019 to generate more profit. 

Furthermore, Netflix reported an increase in net profit and pretax income over the three years. The above increases were attributed to an annual rise in the company's revenues and other income over the same period (Yahoo Finance, 2020). The above-discussed increases in various particulars signify that Netflix has been performing well financially and its financial health is relatively good compared to its competitors in the industry. 

Table 1 

Netflix, Inc. consolidated income statement for 2017, 2018 and 2019. 

Year	12/30/2019	12/30/2018	12/30/2017	2019 % change	2018% change
Total Revenue	20,156,447	15,794,341	11,692,713	27.62%	35.1%
Cost of Revenue	12,440,213	9,967,538	7,659,666	24.81%	30.1%
Gross Profit	7,716,234	5,826,803	4,033,047	32.43%	44.5%
Operating Expense	5,111,980	4,221,577	3,194,368	21.09%	32.2%
Operating Income	2,604,254	1,605,226	838,679	62.24%	91.4%
Pre-tax Income	2,062,231	1,226,458	485,321	68.15%	152.7%
Net Income Common Stockholders	1,866,916	1,211,242	558,929	54.13%	116.7%
Total Expenses	17,552,193	14,189,115	10,854,034	23.70%	30.7%
Net Income	1,866,916	1,211,242	558,929	54.13%	116.7%

Graph 1 

Netflix, Inc. consolidated income statement for 2017, 2018 and 2019. 

Netflix Consolidated Cash flow Statement 

Over the past three years, Netflix reported low cash flows of negative value. The company's operating cash flows increased progressively over the past three years. The negative increase in operating cash flows means that Netflix spent more cash resources to fund its operating activities than cash inflows from its operating activities. 

Over the same period, Netflix, Inc. reported a negative annual cash flows from investing activities. The negative values mean that the company reported more cash outflow from investing activities than cash inflows (Yahoo Finance, 2020). On the other hand, Netflix reported a positive increase in cash flow from financing activities. A positive increase in cash flow from financing activities means that Netflix, Inc. reported more cash inflow from its financing activities than cash outflows (Yahoo Finance, 2020). Despite the negative cash flows from operating and investing activities, the company's end cash position for the three years was positive. The positive end cash position means that Netflix had cash resources that it can use to meet its short-term obligations. 

Table 2 

Netflix, Inc. consolidated cash flow statement for 2017, 2018 and 2019. 

Year	12/30/2019	12/30/2018	12/30/2017
Operating Cash Flow	-2,887,322	-2,680,479	-1,785,948
Investing Cash Flow	-387,064	-339,120	34,329
Financing Cash Flow	4,505,662	4,048,527	3,076,990
End Cash Position	5,043,786	3,812,041	2,822,795
Income Tax Paid Supplemental Data	400,658	131,069	113,591
Interest Paid Supplemental Data	599,132	375,831	213,313
Capital Expenditure	-253,035	-212,532	-227,022
Issuance of Capital Stock	72,490	124,502	88,378
Issuance of Debt	4,469,306	3,961,852	3,020,510
Free Cash Flow	-3,140,357	-2,893,011	-2,012,970

Graph 2 

Netflix, Inc. consolidated cash flow statement for 2017, 2018 and 2019. 

Netflix, Inc. consolidated cash flow statement for 2017, 2018 and 2019. 

Netflix’s Underlying Financial Performance 

Based on the company's financial statements discussed above, Netflix has been performing well over the past three years. The increase in the company’s online subscribers annually has gradually boosted the growth in Netflix’s gross revenues and net profits. In the past decade, Netflix has been heavily investing in creativity and innovation to improve the quality of its online products and services ( Levy, 2020) . Netflix performance growth reported over the past few years is attributed to the increasing number of customers subscribing to its services. In the past three years, Netflix's report an increase of 50% penetration rate into new markets ahead of its close competitors ( Levy, 2020) . Consequently, the company's annual revenues have been increasing significantly over the last three years. 

Building new partnerships with global distributors is another factor which has contributed to the good financial performance of Netflix. The company has been striking deals with pay-television distributors, mobile operators and internet service providers from the 190 countries it operates to increase its annual revenues. Building partnership with international TV and internet services providers has increased the company's coverage and customers subscribing to its services ( Levy, 2020) . As a result, Netflix’s financial performance has improved progressively over the past three years. 

Netflix Current Financial Health 

Sources of Netflix’s Capital 

Netflix has various sources of capital. According to its financial statements, the company is financed by long-term debt, common stock and shareholders' equity. In the past three years, Netflix financed its operations with long-term debts. In 2017, 2018 and 2019, the company report a progressive increase in debt capitalization of $ 6, 499, 432, $ 10,360,058 and $14,759,260 respectively (Yahoo Finance, 2020). Netflix shareholders' equity has also been increasing proportionately over the past three years. The consistent increase in debt capitalization over the past few years infers the company's current financial health is weak that can negatively influence its future operations. Netflix's debt capitalization and shareholders' equity is not a good mix because the debt amount is high than the shareholders' equity. 

Moreover, Netflix's cash and cash equivalent has been increasing over the last three years. However, the company's total current assets decreased from $ 9,694,135 in 2018 to $ 6,178,504 in 2019 while its total current liabilities increased from $ 6,487,320 in 2018 to $ 6,855,696 in 2019 (Yahoo Finance, 2020). The decline in current assets infers that Netflix may fail to settle its short-term obligations a situation which signifies poor financial health. 

Table 3 

Netflix, Inc. current ratio for 2017, 2018 and 2019. 

Year	Current Assets (in billion)	Current liabilities (in billion)	Current ratio
12/31/2019	$6.18	$6.86	0.90087464
12/31/2018	$9.69	$6.49	1.49306626
12/31/2017	$7.67	$5.47	1.40219378

Graph 3 

Netflix, Inc. current ratio for 2017, 2018 and 2019. 

Netflix’s Cash Position 

According to the company's balance sheet, the amount of cash and other liquid resources are relatively low compared to its current liabilities. However, the company has enough non-current assets that can fuel its future growth. For example, the company's fixed assets in 2019 were $ 27,797,208 (Yahoo Finance, 2020). Based on Netflix's previous annual operations, the company's assets in 2019 are enough to facilitate its future development projects. 

Netflix, Inc. has heavily been investing in creativity and innovation. The increased use of technologies to improve the quality of its services can guarantee the company future growth. Use of advanced technologies will increase the company's market penetration rates into new markets in the future (Tseng, 2020). Consequently, Netflix will increase its market share and performance in both local and global markets. 

Furthermore, the company’s retained earnings for the past three years has been increasing steadily. The constant increase in retained earnings implies that Netflix will be able to fund its operating activities in the future. However, its retained earnings for the last three are relatively low compared to its current and future capital demands (Tseng, 2020). Therefore, the company should not pay large dividends but instead reinvest excess funds to generate more profits in the future. 

Netflix’s Financial Value 

According to NASDAQ, Netflix's financial value and position is strong and getting stronger. Tseng (2020), argues that Netflix is the perfect current stock that investors should consider. As of December 18, 2020, the company reported an open share price of $ 533.20 and its highest share value was $ 533.37 translating to + 1.55(0.29%) rise in market value. Netflix's market share price is expected to grow steadily over the next six month despite the adverse effects of COVID-19 that have affected many companies in different industries. Tseng (2020) adds that the company's growth of 5G broadband to homes has increased its penetration rate in both local and international markets. The company expects to cover 50% of the United States population with home broadband services in the future through the use of 5G network services. The expected rise in coverage is likely to increase the company's market value and market share in both local and international markets. The company’s market penetration rate and strategies will generate more revenue which implies that Netflix’s current and future financial health will be good. 

Conclusion 

In summary, Netflix, Inc. is an American Multinational Corporation which provides a wide range of products and services. The company's main products are streaming media, television episodes over the internet and DVD rental by email, brand licensing, and product replacement advertising. In the past three years, the company's financial performance and health have improved due to the increase of customers subscribing to its online streaming services. As a result, Netflix has reported a steady increase in annual revenues and its U.S. market share prices has grown significantly. 

References 

Anderson, D. (2019, November 10).  Netflix Inc.’s organizational structure & its strategic implications . Rancord Society.  https://www.rancord.org/netflix-organizational-structure-design-organizational-chart-characteristics 

Levy, A. (2020, January 29).  3 factors that could lead to sustained Netflix subscriber growth in the U.S. and Canada . The Motley Fool.  https://www.fool.com/investing/2020/01/29/3-factors-that-could-grow-netflix-us-subcribers.aspx 

Tseng, A. (2020, March 30).  Why Netflix's Financial Position Is Strong and Getting Stronger . Nasdaq.  https://www.nasdaq.com/articles/why-netflixs-financial-position-is-strong-and-getting-stronger-2020-03-30 

Yahoo Finance. (2020, December 18).  Netflix, Inc. (NFLX) . Yahoo Finance - Stock Market Live, Quotes, Business & Finance News.  https://finance.yahoo.com/quote/NFLX/cash-flow?p=NFLX 

Appendices 

Netflix, Inc. Consolidated Income Statement 

Netflix, Inc. Consolidated Cash Flow Statement 

Netflix’s Balance sheet: Assets 

Netflix’s Balance sheet: Liabilities and shareholders’ equity