An Analysis of Netflix Financials Coursework Example

An Analysis of Netflix Financials
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ABSTRACT.
The entertainment industry is one that is quickly changing as technology advances to cope with the change in demand for various products yet still, keep their customers satisfied. Netflix has however overcome all the challenges to emerge one of the most enviable entertainment companies in the world. With its key assets being the subscribers it strives to fulfill their needs and remain relevant, and it has no struggle doing this; as it has been easy to adopt change over time. In this paper, however, a dive into the financials of the company, reveal its performance over time, although most of the information is based on the performance of the company in the years 2016 and the semi-annual year ended 2017, it sure reflects how well it has been doing over time and its great news for the investors among other shareholders as most of the measures it puts in place are for the wellbeing of the company and its stakeholders.
An Analysis of Netflix Financials.
As the leading entertainment company, a lot is expected of Netflix. Key among them is maintaining the quality of products that clients love while still satisfying their needs. Netflix has however passed the test of time since it has remained relevant to the market and managed to retain a lot of customers over time and even garner more subscribers (Salapa, 2016) which has resulted in increased revenues for the enterprise over time alongside the need to expand its business to other countries.

Subscriptions, therefore, play a vital role in the existence of the company. To remain in the market, however, you require being profitable, otherwise what is the point of the entire endeavor? It is, however, advisable that expenses remain as low as possible such that the revenue that is earned is not depleted by the settlement of the existing commitments. Hence cash management has to be keenly observed while also working hard to manage your cash flow.
Cash management is critical in any business undertaking, it speaks to the solvency; hence the continuity of business operations and enhancement of the going concern principle and the profitability of an enterprise. Not forgetting to gauge how properly the cash that comes into the business is utilized. Netflix has however depicted how well it could utilize its funds more so with the cash outflow to invest in the short term securities that earn the company a considerable amount of return upon maturity. The company pays keen attention to these investments, reviewing them periodically and also in its classification of such assets in the financial statements. For instance, short-term investments such as marketable securities with original maturities beyond 90 days are classified as available for sale (Netflix Annual Report, 2016).
Cash management is not only limited to investments but the management of accounts receivables especially the amount of collection period allowed; alongside other coupons that could make people settle their debts in time. Increasing the collection rate as well as managing the cash in hand and managing unexpected expenses which the company has no doubt been keen to ensure hence remaining in operation for quite a long time; increasing profitability from one financial period to the other, and even being able to expand its operations over the years.
Cash flow management ensures that there is adequate cash to settle the existing commitments, and debts, money to reinvest, return to the investors and even act as a buffer against financial challenges that the company may face. Not forgetting that the liquid assets will increase considerably as well. A negative cash flow, on the other hand, is a reflection of the declining liquid assets of the company and it puts the company’s liquidity at risk. Netflix cash flow has since been increasing, and it is still expected to increase at the end of the year if consistency in the trend is observed.
A financial statement analysis entails, vertical analysis of the accounts represented in the financial statements, horizontal analysis or the trend analysis (Investopedia, U.L.P.) which compares the changes in amounts for the varying periods and the different financial ratios. In evaluating the performance of Netflix, however, let’s analyze the statements by; the trend analysis and vertical analysis as well as performed an evaluating of the return on investments and the profitability of the enterprise.
The revenue of the enterprise increases from one financial period to the other, the trend has been observed over the years and given the revenue already earned in the semi-annual period an increase is still expected at the end of the year. Given that most revenue comes from the subscriptions, the company has worked hard to retain its clients and also enhance new subscriptions over the years hence living up to and even exceeding expectations. As the revenue increases, so does the costs as well, this if not managed could escalate and affect the performance of the company, hence it is in the best interest of the company to minimize costs as much as possible, although it could also aim at maintaining the fixed costs at a reasonable amount to reduce the effects they have on the profitability of the entertainment company.
The company is doing quite well in regards to liquidity; however, the expenses are to be observed at relatively low rates to minimize the effects they could have in watering down the revenue earned during the fiscal periods. The cost of revenue is no doubt relatively high, averaging at 68% against the revenue, while other expenses are below 10%, except for marketing which is slightly above 10%.( Netflix Annual Report, 2016) It’s commendable, how the company has managed to control and minimize expenses although if it were possible, a reduction in the cost of revenue could do so much good for the company, while it strives to maintain the rest of expenses below 10% relative to the revenue. On the other hand, the assets of the company have remained high and continue to increase as well, the most essential to the enterprise being cash and cash equivalents which takes the lead among other current and non-current assets. Another crucial asset to the company is the content assets, which the company should strive to increase, while it also strives to reduce the accounts payables.
The profitability of an enterprise is measurable in two ways; its ability to convert sales revenue to profits at the various stages for which it is measured and the efficiency of the enterprise to generate returns for its shareholders. Among the commonly used profitability ratio, yet one that speaks volumes as to the performance of an entity is the net profit margin, it is a representation of how much of the sales dollar is associated with the net income having paid all other expenses. As for Netflix, this margin has been increasing, and it is yet to increase in the future with the increase in revenue. While on the other hand, the return on equity is also a crucial ratio that any investor looks at before deciding to invest. It, however, shows the performance of the company, while utilizing the shareholders’ funds. Hence they gauge whether it is efficient or not. Netflix is, however, doing so well, and the rate has been increasing yearly.
The company has been in operation for quite a long time, which is a great achievement for the entertainment company since it has stood the test of time especially since this industry experiences change from time to time. Other than that, it has also managed to remain solvent, and it’s doing so well financially. A thorough analysis of its financial statements will in no doubt earn the hearts of many investors and clients as well.
References.
Investopedia, U. L. C. What is a Cash Flow Statement.
Salapa, G. (2016). Why Netflix’s Financials Are Better Than You Think. Valley Voices.