Financial Analysis and Management

The provided assignment is a comprehensive document that covers various aspects of financial analysis and management. It begins with an introduction to financial modeling, discussing the importance of accurate valuation and the role of cash holdings in firm performance. The document then delves into the application of Porter's five forces framework for industry analysis, highlighting the need for sensitivity analysis in building energy models. Additionally, it reviews various financial ratio analysis tools, including current, debt-to-equity, interest coverage, gross profit, and operating profit ratios. The assignment also touches on real option valuation, dividend, cash flow, and residual income models, as well as a review of sensitivity analysis methods in building energy analysis. It concludes with an exploration of entertainment industry economics and the competition situation analysis of the shale gas industry in China.

FINANCIAL AND
BUSINESS ANALYSIS

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................1
INDUSTRY ANALYSIS................................................................................................................3
Rivalry among existing competitors.......................................................................................4
Threat of new entrants............................................................................................................4
Threat of substitute products..................................................................................................4
Bargaining power of buyers...................................................................................................5
Bargaining power of suppliers................................................................................................5
FINANCIAL RATIOS.....................................................................................................................5
Liquidity ratios.......................................................................................................................5
Solvency ratios.......................................................................................................................6
Profitability ratios...................................................................................................................7
Employee count measures......................................................................................................9
Accuracy of the Financial statements...................................................................................10
Absolute Valuation with Gordan Growth Model.................................................................11
Free cash flow valuation.......................................................................................................17
Relative Valuation based on comparable data......................................................................17
REFERENCES..............................................................................................................................19

ILLUSTRATION INDEX
Illustration 1: Revenue on International Platform...........................................................................2
Illustration 2: Porter's five force model...........................................................................................4
Illustration 3: Current ratio..............................................................................................................6
Illustration 4: Debt to equity ratio....................................................................................................7
Illustration 5: Interest coverage ratio...............................................................................................7
Illustration 6: Gross profit ratio.......................................................................................................8
Illustration 7: Operating profit ratio.................................................................................................8
Illustration 8: Net profit ratio...........................................................................................................9
Illustration 9: Revenue per employee............................................................................................10
Illustration 10: Comparison of earning per share..........................................................................14
Index of Tables
Table 1: Calculation of liquidity ratio..............................................................................................5
Table 2: Solvency Ratios.................................................................................................................6
Table 3: Calculation of Profitability ratios......................................................................................7
Table 4: Calculation of Employee count measures..........................................................................9
Table 5: Balance Sheet based accrual ratio....................................................................................10
Table 6: Cash Flow based accrual ratio.........................................................................................11
Table 7: Calculation of operating cash flow to operating income.................................................11
Table 8: Estimated Return on Equity.............................................................................................12
Table 9: Forecasted Net income....................................................................................................12
Table 10: Calculation of Retention rate.........................................................................................13
Table 11: Calculation of Sensitivity Analysis...............................................................................16
Table 12: Free Cash Flow Valuation.............................................................................................17

EXECUTIVE SUMMARY
In order to make analysis of business performance there are mainly two aspects included
which are financial and non-financial. In the present study, financial aspect is covered for
assessing company's performance in the relevant industry. In the current research, Netflix
company is taken as a base which is one of the largest firm operating in entertainment industry. It
is American based public enterprise and having presence in more than 190 countries. The present
study focuses on industry analysis using Porter’s five force model. Apart from this, financial
ratios are calculated up to five accounting periods and financial statements on the basis of
accuracy are prepared. In addition to this, valuation process is shown of the company after
consisting Gordon Growth Model. Free cash flow valuation of Netflix entertainment entity is
also described in the present study. At the end of report, technical analysis is presented of the
cited firm and then business performance is analysed in proper direction.
Company profile – Netflix
Netflix is an America – based company which is the world's leading organisation in the
internet television network. It has total subscribers list of 104 million in around 190 countries
with 5 million + subscribers in United Kingdom and 52 million in United States and an
employee count of 3500 employees. It earned a total revenue of US $ 8.83 billion in the year
2016. Netflix has an incredible count of 125 million hours of TV shows and movies per day. Any
subscriber is allowed to play, pause, and resume any video with any commercial commitments.
The company has an offering capacity of more than 15,000 titles and also maintains an inventory
of more than 5 million discs of movies and TV series. Netflix provides its streaming services on
a number of compatible devices which include Blu-ray Disc players, tablet computers, mobile
phones, high definition television (HDTV) receivers, home theatre systems, set top boxes, and
video game consoles. Company's biggest competitors are Amazon Prime Inc. and Hulu plus,
these two companies cover a market share of 13% and 6.5% respectively against the huge market
share of 36% hold by Netflix of the American households.
Revenues of can be divided as follows: The company have been planning to opt for
global expansion in order to expand its business. It has already been present in most of the
countries of the world.
Revenues of can be divided as follows :
1

The above graph shows a significant increase in its revenue in comparison to 2007. The
data reveals that the reveue of the entity was 7.48 million in 2007 which has increased to 86.74
million according to quarter 3 results of the organization. The main reason of this increase is due
to rise in the prevalence of internet where people can watch online series, films etc.
Collaboration:
Netflix a part of producing its original content and copy rights on several other contents,
also fixed a deal of collaborations with a good deal of entertainment production houses. In 2013,
Netflix and Dream works made a deal to produce turbo fast (Pianosi, Sarrazin and Wagener,
2015). And in the same year Netflix and Marvel collaborated to create several marvels sciences –
fiction superhero based TV series for the sci-fi audience which included Daredevil, Jessica
Jones, Iron Fist and Luke Cage. These series were set to run for an initial of 5 seasons. It was
calculated that marvel deal costed Netflix about $300 million in total. Netflix also collaborated
with many stand-up artists to create stand-up shows. Also, Netflix and Ruko partnered to provide
2
Illustration 1: Revenue on International Platform

super high definition content to the subscribers. Netflix also have a huge base with a
collaboration made with Leonardo DiCaprio for his documentaries. Deal between Netflix and
Disney was made in 2012 by creation of movies.
Strategy to expand business :
Strategy to expand business:
Netflix opted for an excellent strategy to co produce shows with other entertainment units
whose content was already a success in other sources available giving it a boost to the revenue. It
also gave a decent focus on the R&D activities to keep the content updated and attractive to the
subscribers (Tian, 2013).
Exchange rate risk:
As, Netflix operates in 190 countries it's risk of exchange rate is particularly high. Its
rate risk between United Kingdom and America has been good for the company as it has jumped
for $1.8-1.3 to every one euro. Netflix also shares big risks in the countries like India, China as
the exchange rate is quite high of 0.15 US dollar to one Chinese Yuan and 0.016 US$ to 1 Indian
Rupee.
It is an important driving factor which is considered by Netflix while planning for global
expansion. The currency exchange rate and economy of the country helps in deciding that how
much revenue it can generate from the same. The prices are decided according to the purchasing
power of the company and this is the reason why prices of the entity fluctuates among the
countries.
INDUSTRY ANALYSIS
Entertainment industry is one of the fastest growing and having high contribution in
growth rate of every economy. For analysing particular sector there are several kinds of methods
available with the analyst and one of them is Porter's five forces model. By using this, basically
four aspects of the overall industry are analysed in appropriate direction. In this respective
market segment, there are various companies operating in the present era but level of substitute
products is very low (Porter's Five Forces, 2016). Moreover, industry analysis of entertainment
with the help of Porter's five forces is such as follows:
3

Illustration 2: Porter's five force model
Rivalry among existing competitors
In the entertainment industry, there are various companies having great presence but very
fewer firms using the television mode. The Netflix company’s major services are film
production, distribution and television. Further, because of operating few businesses in this kind
of services, level of competition is at the moderate level. The existing entertainment entities are
trying to maintain dominance and due to which also rivalry between currently operating
competitors is moderate.
Threat of new entrants
Another factor of industry analysis is threat of new entrants in which potential companies
which will enter in the market are considered. In this entertainment sector, entry barriers for the
potential entities are low (Yunna and Yisheng, 2014). Along with this, loyalty of the consumers
towards businesses is weak and due to which threat of new firms is moderate in the selected
market segment.
Threat of substitute products
In the chosen sector, availability of the substitute products and services is at the moderate
to high level. In addition to this, alternative methods of this are on demand, purchasing DVDs,
4

theatres etc. Henceforth, it can be analysed that, threat of substitute items in entertainment
industry is moderate and little high.
Bargaining power of buyers
When talking about bargaining at the time of purchases from the consumers side then it is
high in entertainment sector. Very basic reason of this is that, buyer's loyalty towards the
company is weak. Along with this, revenue generated from customers at the majority level is
included in this segment. Moreover, bargaining power of buyers in entertainment field is high (E.
Dobbs 2014).
Bargaining power of suppliers
The last force through which industry is assessed is similar to bargaining power of
suppliers which is high in the entertainment. There is availability so many legal issues that are to
be dealt with along with licensing deals. Hence, bargaining power of the entertainment
businesses like Netflix is high.
FINANCIAL RATIOS
Method by which performance of the particular company is analysed in proper manner by
considering financial statements is known as financial ratios. It includes several measurements
and in the present study liquidity, solvency, profitability and employee count measures are used
(Babalola and Abiola, 2013). Further, the ratios for Netflix company are stated below:
Liquidity ratios
Table 1: Calculation of liquidity ratio
Liquidity ratios Formula 2012 2013 2014 2015 2016
Current assets Current assets /
current
liabilities
2241 3059 3940 5432 5720
Current liabilities 1676 2154 2663 3530 4587
Current ratio 1.34 : 1 1.42 : 1 1.48 : 1 1.54 : 1 1.25 : 1
5

2012 2013 2014 2015 2016
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
1.34 1.42 1.48 1.54
1.25
Illustration 3: Current ratio
From the above calculated ratio, it can be found that, from the FY 2012 to 2015
proportion of current ratio increases from 1.34:1 to 1.54:1 which indicates that business
performance is in positive direction. After the fiscal period 2015, current ratio declines from
1.54:1 to 1.25:1 where performance reduces. Further, overall liquidity position of Netflix
company is moderate in the entertainment industry.
Solvency ratios
Table 2: Solvency Ratios
Solvency ratios Formula 2012 2013 2014 2015 2016
Debt
Debt / equity
400 500 900 2371 3364
Equity 745 1334 1858 2223 2680
Debt to equity
ratio 0.54:1 0.37:1 0.48:1 1.07:1 1.26:1
Earnings before
interest and taxes
Earnings before interest
and taxes / Interest
expenses
50 228 403 306 380
Interest expenses 20 29 53 133 150
Interest coverage
ratio 2.50 7.86 7.60 2.30 2.53
6

2012 2013 2014 2015 2016
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
0.54
0.37
0.48
1.07
1.26
Illustration 4: Debt to equity ratio
2012 2013 2014 2015 2016
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
2.50
7.86 7.60
2.30 2.53
Illustration 5: Interest coverage ratio
According to above stated graphs, company has not been performing well at the end of
two financial years i.e. 2015 and 2015. The reason is that, it has higher debt in comparison to the
equity share capital (Delen, Kuzey and Uyar, 2013). In addition to this, Netflix firm is less
capable to pay amount of interest from FY 2013 to 2016. Hence, according to solvency ratios
business performance of Netflix is poor. For reducing debt to equity ratio, the Netflix needs to
boost up profit and raise fund through equity rather than debt.
Profitability ratios
Table 3: Calculation of Profitability ratios
Profitability ratios Formula 2012 2013 2014 2015 2016
7

Gross income 983 1291 1752 2188 2801
Operating income 50 228 403 306 380
Net income 17 112 267 123 187
Net sales 3609 4375 5505 6780 8831
Gross profit ratio
Gross income / net
sales 27.24% 29.51% 31.83% 32.27% 31.72%
Operating profit
ratio
Operating income /
net sales 1.39% 5.21% 7.32% 4.51% 4.30%
Net profit ratio
Net income / net
sales 0.47% 2.56% 4.85% 1.81% 2.12%
2012 2013 2014 2015 2016
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
27.24%
29.51%
31.83% 32.27% 31.72%
Illustration 6: Gross profit ratio
8

2012 2013 2014 2015 2016
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
1.39%
5.21%
7.32%
4.51% 4.30%
Illustration 7: Operating profit ratio
2012 2013 2014 2015 2016
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
0.47%
2.56%
4.85%
1.81% 2.12%
Illustration 8: Net profit ratio
It has been ascertained from the above charts that, from FY 2012 to 2014 gross, net and
operating profit ratios of Netflix are increasing consistently. When visualising at the net income
ratio only then it is 0.47% only at the year ending 2012. As the year passed, such value increased
and reached up to 4.85% in the year 2014. The same position is there under another two
profitability ratios (Vogel, 2014). Moreover, from FY 2014 to 2016 net profit declines from
4.85% to 2.12% which shows that Netflix is unable to manage its indirect expenses. On the basis
of this, it can be analysed that, during initial three years business performance was well and then
declined consistently.
9

Employee count measures
Table 4: Calculation of Employee count measures
Employee count
measures Formula 2012 2013 2014 2015 2016
Employees (number) 2429 2327 2450 3700 4700
Revenue of company 3609 4375 5505 6780 8831
Revenue per employee
(Amount in million)
Revenue / number
of employees 1.49 1.88 2.25 1.83 1.88
2012 2013 2014 2015 2016
0.00
0.50
1.00
1.50
2.00
2.50
1.49
1.88
2.25
1.83 1.88
Illustration 9: Revenue per employee
Number of total employees (full-time + part-time) in Netflix are 2429 at the end of year
2012 which eventually increased and reached at 4700 workers in the year 2016. When
considering to the revenue on each employee then it was 1.49 in 2012 which enhanced till 2014
up to 2.25. After that, revenue declined continuously from 2014 to 2016 and as of now it is 1.88
only.
Accuracy of the Financial statements
Balance sheet based accrual ratio
Table 5: Balance Sheet based accrual ratio
10

Balance Sheet based accrual ratio
2012 2013 2014 2015 2016
Total Assets 3968 5413 7057 10203 13578
Less: Cash and cash equivalents 290 605 1114 1809 1468
Operating Assets (A) 3678 4808 5943 8394 12110
Total liabilities 3223 4079 5199 7979 10907
Less: Long term debt 400 500 900 2371 3364
Operating liabilities (B) 2823 3579 4299 5608 7543
Net Operating Assets (A-B) 855 1229 1644 2786 4567
Balance Sheet on accruals 53 54 70 140 198
Average Net Operating Assets 802 1175 1574 2646 4369
Balance Sheet Accruals Ratio 6.61 4.60 4.45 5.29 4.53
Cash flow based accrual ratio
Table 6: Cash Flow based accrual ratio
Particulars 2012 2013 2014 2015 2016
Net income 17152 112403 266799 122641 186678
Operating cash flow 22765 97831 16483 -749439 -1473984
Investing cash flow -245919 -255968 -42866 -179192 49765
Aggregate accruals -206002 -45734 240416 -805990 -1237541
Average NOA 802 1175 1574 2646 4369
Cash flow accrual ratio -256.86 -38.92 152.74 -304.61 -283.25
Operating cash flow to operating income
Table 7: Calculation of operating cash flow to operating income
Particulars 2012 2013 2014 2015 2016
Operating cash flow 22765 97831 16483 -749439 -1473984
Interest paid 19986 29142 53279 132716 150114
11

income tax paid 13328 58671 82570 19244 73829
operating cf bef I and T 56079 185644 152332 -597479 -1250041
EBIT (Operating income) 49992 228347 402648 305826 379793
Ratio 1.12 0.81 0.38 -1.95 -3.29
Absolute Valuation with Gordan Growth Model
The three-main classification to calculate estimated stock are, Dividend Discount Model
(DDM), Relative comparison and multipliers. DDM consists of two main parts that are,
Estimation of Growth Rate and Required Rate of Return.
Rate of Growth: The estimated growth rate can further be divided into return on equity and
retention rate.
Return on equity: Return on equity is further divided into five components that is Tax burden,
Interest, EBIT margin, Asset turnover and Financial leverage.
Calculation of estimated Return on equity.
Table 8: Estimated Return on Equity
Particulars 2012 2013 2014 2015 2016 2017
(forecast)
Tax burden 0.44 0.34 0.23 0.13 0.28 0.28
Interest 0.03 0.07 0.08 0.02 0.03 0.05
EBIT margin 0.84 3.91 6.35 2.09 2.95 3.23
Asset turnover 1.03 0.93 0.88 0.79 0.74 0.87
Financial leverage 5.33 4.06 3.8 4.59 5.07 4.57
ROE 0.02 0.11 0.17 0.06 0.08 0.09
Earnings per share forecast
The major impact of retention rate relies on Earning per share which have a varied flow
in the last 5 years. In order to understand the retention ratio, it is important to calculate
forecasted earnings of Netflix in 2017 (Spitz and et.al., 2012).
12

There is an increase in the sales of the company the mean of company's past 5 years sales
is 30% which has led to forecasted sales for 2017 to 17622. The following table displays the
effect of sales on net income of the company.
Table 9: Forecasted Net income
Earnings per share forecast
2012
%Ch
ange 2013
%Ch
ange 2014
%Ch
ange 2015
%Ch
ange 2016
%Ch
ange 2017
%Cha
nge
Total revenue 3609 100 4375
100.0
0 5505
100.0
0 6780
100.0
0 8831
100.0
0
1766
2
100.0
0
Less: Cost of
sales 2626 72.76 3083 70.47 3753 68.17 4591 67.71 6030 68.28
1019
0.7 69.48
Sales, General
& Admin
expenses 604 16.74 684 15.63 877 15.93 1231 18.16 1569 17.77
1820.
04 16.84
Research and
development 329 9.12 379 8.66 472 8.57 651 9.60 852 9.65
928.6
8 9.12
EBIT 50 1.39 229 5.23 403 7.32 307 4.53 380 4.30 395.2 4.55
Interest 20 0.55 29 0.66 53 0.96 133 1.96 150 1.70
151.7
5 1.17
EBT 30 0.83 200 4.57 350 6.36 174 2.57 230 2.60
237.7
9 3.39
Tax 13 0.36 59 1.35 83 1.51 19 0.28 74 0.84 74.64 0.87
Net income 17 0.47 141 3.22 267 4.85 155 2.29 156 1.77
159.9
3 2.52
Dividends
Netflix is not involved in paying any kind of dividend to its shareholders. No data have
been found regarding dividend in the financial statements of Netflix in past 5 years. The reason
is it planning to expand and investing the profits back to the business. It has helped to have large
amount of capital. The company may give dividend in near future if it is able to complete the
project it is planning for.
13

Retention rate
Table 10: Calculation of Retention rate
Retention Rate
2012 2013 2014 2015 2016 2017
(Forecasted)
Earnings per share 0.04 0.26 0.62 0.28 0.43 0.326
Divided paid 0 0 0 0 0 0
Dividend pay-out
ratio 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Retention Rate 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Retention rate is quite constant in 2012, 2013, 2014, 2015, 2016. It can be forecasted that
it will remain constant in 2017 as well. No dividend is paid by Netflix which is a major driving
factor for constant retention ratio of the entity. A typical pattern is followed by the company
14
Earning per share
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2012
2013
2014
2015
2016
2017 (Forecasted)
Illustration 10: Comparison of earning per share

which why they are not giving any dividend to its shareholders. It slowdown the growth rate as
more shareholders will not like to invest in the company in near future.
Rate of growth-Final value
Sustainable growth rate is Return on equity is 0.09 and the predicted retention rate is
1.00. There is a zero growth in the dividend of the company as no dividend is provided by
Netflix to its shareholders. It shows sustainable growth rate of 9% which may not be a good sign
for the organization. It is a predicted figure which may change and any drastic variation may take
place in the industry and the economy. There is a 30% change in the sales of the enterprise that
has been assumed for next year (Montazeri and Blocken, 2013).
Required rate of return
WACC: Netflix do not have any preferred stock which shows that the company doesn't own any
non-voting securities to which a fixed amount of dividend is paid every year without failure. The
equity and debt of Netflix in the year 2016 are, 19.72 and 24.76 which has led to debt equity
ratio of 1.26 for the entity.
Cost of equity:
The formula for calculating cost of equity is:
Ke = (D1 / Po) + g
where,
Ke = Cost of equity
D1 = Dividend
Po = Price of shares
g = Growth rate
Cost of equity for Netflix can be calculated as:
D1 = 0, no dividend in provided to the shareholders by the entity
Price of the share of Netflix is 180.27 (as on 5th August 2017)
Growth rate is 30%
Hence, Cost of equity = (0/180.27) + 5%
= 5%
Therefore, 30% is the cost of equity of Netflix.
Another approach used to calculate cost of equity is CAPM which can be used as follows:
= Re = Rf + Beta (Rm – Rf)
15

Rf = 2.47%
Beta = 1.12
Rm = 11.26
Re through CAPM = 2.47% + 1.12 (11.26 – 2.47)
Re = 12.31%
The two methods differ in their results The cost of equity using growth model is 5% and from
that of CAPM model is 12.31%. Hence, the average of the two will be taken into consideration.
The calculated average of cost of equity is 8.65
Cost of debt
Cost of debt can be calculated in the following manner
Interest paid on debt = 150, that is debts have been paid at 6.32% of interest on the total
long-term debt
Percentage tax paid = 28%
Cost of debt = 6.32 (1 – 0.28)
= 4.55
One stage dividend discount model
Since, no dividend is provided by Netflix to its shareholders hence, dividend discount
model for the company is zero. It is assumed that if the company starts to distribute dividend it
will be 6%.
It shows that Required rate of returns (WACC) can be calculated in the following
manner:
4.55 * 64% + 21.16 * 35%
= 2.91 + 7.41
= 10.32
Formula for dividend discount model is
Vo = D1/(r-g)
where,
D1 = Dividend = 6%
G = Growth = 5%
R = 10.32
Vo = 6 / (10.32%-5%)
16

= 112.78
Sensitivity analysis
Table 11: Calculation of Sensitivity Analysis
Sensitivity Analysis
Growth 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5
WACC
8.32 112.78 124.48 138.89 157.07 180.72 212.77 258.62 329.67 454.55 731.71
8.82 103.09 112.78 124.48 138.89 157.07 180.72 212.77 258.62 329.67 454.55
9.32 94.94 103.09 112.78 124.48 138.89 157.07 180.72 212.77 258.62 329.67
9.82 87.98 94.94 103.09 112.78 124.48 138.89 157.07 180.72 212.77 258.62
10.32 81.97 87.98 94.94 103.09 112.78 124.48 138.89 157.07 180.72 212.77
10.82 76.73 81.97 87.98 94.94 103.09 112.78 124.48 138.89 157.07 180.72
11.32 72.12 76.73 81.97 87.98 94.94 103.09 112.78 124.48 138.89 157.07
11.82 68.03 72.12 76.73 81.97 87.98 94.94 103.09 112.78 124.48 138.89
12.32 64.38 68.03 72.12 76.73 81.97 87.98 94.94 103.09 112.78 124.48
12.82 61.10 64.38 68.03 72.12 76.73 81.97 87.98 94.94 103.09 112.78
The sensitivity graph has been formed using WACC, Growth rate and dividend. The
intrinsic value obtained for 5% growth rate and 10.32% WACC is 122.78. It shows how sensitive
the stock value actually is (Damodaran, 2012). The range have been increased and decreased on
both side of growth and WACC so that the fluctuations can be understood in better manner. It
has been assumed that the change will not vary more than + / - % and it has helped to ascertain
the whole picture of Netflix, if the company decided to pay dividend to its shareholder equals to
the assumed amount.
Justified leading P/E ratio
P/E ratio can be calculated using Gordan model with the help of WACC in the following
manner:
= {Do(1+g) / E}/(r – g)
where,
D = 6
G = 5%
17

R = 10.32
E = 11.25
Therefore, justified leading P/E ratio is 3.2. However, actual PE ratio is 10.91. The ratio
may differ according to the change in dividend policy of Netflix. A fluctuation in growth rate
and required return of capital will also bring significant change in the actual and justified P/E
ratio of the company (Attig and et.al., 2013).
Free cash flow valuation
Single stage free cash flow to equity valuation
Table 12: Free Cash Flow Valuation
2012 2013 2014 2015 2016
Free Cash Flow
Firm 12599 12918 12596 11141 10007
Free cash flow
equity 2368.23 2428.20 2367.67 2094.17 1881.02
Free cash flow firm are the amount that were already available in the cash flow statement
of Nteflix. However, Free Cash Flow equity has been calculated by diving Free Cash Flow Firm
with that of (WACC – g).
Free cash flow to equity helps in measuring the cash that has been paid to the equity
shareholders after considering all the other expenses such as reinvestment and paying off of
debts. The analysts of Netflix can make use this to determine the value of the company. It is
popular method of valuation and an alternative of Dividend Discount Model.
Free Cash Flow to the Firm helps in measuring financial performance of the company It
determines the net cash amount that has been generated for the firm after considering expenses,
taxes, change sin net working capital and investment deducted. It is the cash that is available to
the investors for long term and short term assets. Bondholder and stockholders both are included
in Free cash Flow to the Firm.
Relative Valuation based on comparable data
Price to sales: According to the valuation of 2016, Price to sales of Netflix is 7.8 which is quite
higher from that of industry average which happens to be 2.5. It is a metrics to valuation of
stock. It indicates the price that has been kept for every 1 sale. A low ratio indicates
18

undervaluation as in the case of Netflix. The ratio is below industry average refers to
undervaluation of the products being sold at Netflix.
Price to earnings: The ratio for Netflix is 219.8 which is quite higher in comparison to the
industry average which is 22.7. It depicts the current share price in relation with per share
earning (Heinrichs and et.al., 2013). A higher ratio indicates that the investors are expecting
higher growth in near future.
Price to book value: The price to book value ratio of Netflix is 25. The industry average for the
same is 4.3 which is quite lower than the actual amount of the entity. The ratio compares stock
market value to its book value. The formula for calculating price to book value ratio is diving the
current closing price of the stock with that of book value per share. A higher value of Netflix
shows that the stock is overvalued in comparison to the actual. It shows that the company have to
pay for too much if it goes into liquidation.
Enterprise Value to EBITDA: The ratio is calculated by dividing Enterprise value to EBITDA.
It is a widely used evaluation tool which helps the investor to evaluate the performance of the
company. The investors compare this ratio with the same industry company in order to find out
that which company is performing better. It also helps them in deciding the company in which
they should invest so that it gives higher return to them (Du and Hennessy, 2012). The ratio
remains unaffected with the change in the capital structure of the company. It also doesn't have
any impact of non cash expenses on the value of the entity.
Enterprise Value to Revenue: It compares the value of stock to the overall enterprise value of
the organization. It helps in determining the condition of the company and give accurate picture
of its performance.
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REFERENCES
Books and Journals
Attig, N. and et.al., 2013. The governance role of multiple large shareholders: evidence from the
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Babalola, Y. A. and Abiola, F. R., 2013. Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences. 1(4). pp. 132-137.
Damodaran, A., 2012. Investment valuation: Tools and techniques for determining the value of
any asset (Vol. 666). John Wiley & Sons.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A
decision tree approach. Expert Systems with Applications. 40(10). pp. 3970-3983.
Du, X. and Hennessy, D. A., 2012. The planting real option in cash rent valuation. Applied
Economics. 44(6). pp.765-776.
E. Dobbs, M., 2014. Guidelines for applying Porter's five forces framework: a set of industry
analysis templates. Competitiveness Review. 24(1). pp. 32-45.
Heinrichs, N. and et.al., 2013. Extended dividend, cash flow, and residual income valuation
models: Accounting for deviations from ideal conditions. Contemporary Accounting
Research. 30(1). pp.42-79.
Montazeri, H. and Blocken, B., 2013. CFD simulation of wind-induced pressure coefficients on
buildings with and without balconies: validation and sensitivity analysis. Building and
Environment. 60. pp.137-149.
Pianosi, F., Sarrazin, F. and Wagener, T., 2015. A Matlab toolbox for global sensitivity
analysis. Environmental Modelling & Software. 70. pp.80-85.
Spitz, C. and et.al., 2012. Practical application of uncertainty analysis and sensitivity analysis on
an experimental house.Energy and Buildings. 55. pp.459-470.
Tian, W., 2013. A review of sensitivity analysis methods in building energy analysis. Renewable
and Sustainable Energy Reviews. 20. pp.411-419.
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Vogel, H. L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Yunna, W. and Yisheng, Y., 2014. The competition situation analysis of shale gas industry in
China: Applying Porter’s five forces and scenario model. Renewable and Sustainable
Energy Reviews. 40. pp. 798-805.
Online
Porter's Five Forces, 2016. [Online]. Available through:
<https://www.mindtools.com/pages/article/newTMC_08.htm> [Accessed on 5th August
2017].
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