Financial Statement Analysis Report PDF

Running head: FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis
Name of the Student:
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Author’s Note

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FINANCIAL STATEMENT ANALYSIS
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Company Overview and Analysis..........................................................................................2
Macroeconomic Analysis.......................................................................................................3
Industry Analysis...................................................................................................................6
Competitors Analysis.............................................................................................................7
Business Strategy and Model...............................................................................................10
Corporate Events..................................................................................................................11
Analysis of the Financial Performance................................................................................12
Ratio Analysis......................................................................................................................12
Company Valuation.............................................................................................................15
Free Cash Flow Model.........................................................................................................16
Conclusion................................................................................................................................17
Reference..................................................................................................................................18
Appendix..................................................................................................................................20

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FINANCIAL STATEMENT ANALYSIS
Introduction
The main purpose of the assessment is to analyze the business of Netflix which is
engaged in entertainment service industry. The assessment would be considering the market
situation for the business and estimate whether the factors which are present in the market are
appropriate for the growth of the business. The analysis would be including PESTLE
Analysis and Porter’s five forces model for a better understanding of the factors which have
an impact on the operations of Netflix. The assessment would also be identifying critical
events which have taken place impacting the operations of Netflix. In order to review the
financial performance, ratio analysis and company valuation model would be applied for
better analysis. Finally, the assessment would be providing appropriate investment
recommendations for the business of Netflix considering all the factors affecting the
operations of the business.
Discussion
Company Overview and Analysis
The business of Netflix is a fast growing business which streamlines entertainment
and basically is an entertainment service provider. The application provides access to
different genre of movies, documentaries, serials. The company has access to 190 nations
getting a charge out of more than 125 million hours of TV which generates maximum portion
of revenue for the business (Netflixinvestor.com. 2020). The management of the company is
continuously trying to make improvements in the operational activities of the business by
improving the technological aspect of the business.
In terms of market strategy, the business of Netflix follows STP strategy which
involves Segmentation, Targeting and Positioning strategy for effectively attracting more
customers to the operations of the business. The management of Netflix is extremely alert for

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FINANCIAL STATEMENT ANALYSIS
change in innovation and buyer contracts. As per 2015 data, it was estimated that more than
2.7 million Australian are using Netflix for watching any movies or series for the purpose of
entertainment. The management of Netflix considers different factors such as age, income,
geographic region, and watching preference for providing the best of services for the
customers (Netflix: Segmentation, Targeting & Positioning 2016). The company is trying to
expand its reach to customers which would help the business to earn more revenue from
operations of the business (Shih and Kaufman 2014). In terms of business segments, the
business is looking to expand the operations of the business further by targeting people on the
basis of age, preferences and customers.
Macroeconomic Analysis
Macroeconomic Analysis for a business is undertaken for the purpose of
understanding different factors which have an impact on the operations of a business. The
analysis would be showing PESTLE analysis for the business which is quite a useful
technique for taking appropriate decisions regarding the activities which needs to be
undertaken for the business for expanding the revenue which the business is able to generate
(Pant and Yu 2018). The different factors which impact the operations of Netflix are listed
below:
 Political factors: The political factors include impacts of government regulations and
intervention in day to day operations of a business. The business of Netflix operates
with a aim to digitalize different contents of movies, Tv shows and documentaries. In
some countries some contents are prohibited considering the laws and regulations
which are already implemented (Zalengera et al. 2014). It is an obvious fact that the
management of Netflix would not want to offend a population by streamlining a
certain content of work. One of the prime examples of political influence was the

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FINANCIAL STATEMENT ANALYSIS
marketing of the TV series Narcos which offended the people of Colombia. This was
a reason that Netflix decided to reduce their efforts to promote the TV series.
 Economic Factors: The price at which the product or service is provided is an
important factor which affects the profits which is generated by the business. The
purchasing power of the consumers is also an important factor which needs to be
considered (McDonald and Smith-Rowsey 2016). In Netflix's case, the business
charges a different monthly fee based not only on the country's economy but also on
the nature of content which is shown in the application.
Figure 1: (Cost Comparison on the basis of Different Countries)
Source: (Netflix Inc 2019)

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FINANCIAL STATEMENT ANALYSIS
 Social Factors: The social factors incudes the taste and preference of the targeted
customers of the business and this factor is considered to be important as this directly
impacts the decision making process of the business. Netflix streamlines TV contents
and movies for which it charges monthly or quarterly fees based on the subscription
requirements (Summers et al. 2016). The opinions of the customers who are
subscribing to the services needs to be positive and this can impact the operations.
 Technological Factors: The technological level in an industry is continuously
changing which has a direct impact on the activities of a business. It is important that
businesses needs to adapt to the changes which is taking place in the business. In the
case of Netflix, movies and shows are shown through online medium and therefore it
is imperative that advanced user interface is used for promoting efficiency in the
operations of the business. The use of social media is important in this age of
digitalization and the same is also important in the business of Netflix. In current
scenario, the business is using the most advanced technology for maintaining the
portal and also for providing the best experience to the users.
 Legal Factors: The legal factors include regulations and rights of the customers
which are applicable to the country. Netflix must ensure that they respect the regional
restrictions of certain shows or films so that it does not affect the population. In
addition to this, the business also needs to adhere to digital laws so that efficiency is
maintained in the operations of the business.
 Environmental Factors: This refers to the CSR responsibilities which the businesses
need to adhere to while providing services. The business of Netflix provides services
and therefore they are not depleting any form of natural resources. However, carbon is
produced when they are using electricity for running their servers. The company has
also taken step in this respect by installing wind turbines so that clean electricity can

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FINANCIAL STATEMENT ANALYSIS
be generated. In 2019, the company has managed to change to 50% clean
electricity so it can be said that the business is trying to make the working
environment of the company sustainable.
Industry Analysis
Netflix is the leading streaming video company which has more than 130 million
subscribers. The application provides best TV shows, movies and series for the purpose of
entertainment and also generating revenue from the service. The business of Netflix was the
first pioneers in this industry which assisted the business to build a brand name for itself in
the market and also create competitive advantage which would help in generating appropriate
profits over the long run. The business is expected to grow at approximately USD 82 Billion
by 2023, at 17% of compound annual growth rate considering the current trends which is
available in the market. Some of the competitors which are present in the same industry are
Amazon, Hulu, HBO, Google which provides similar services. A graphical representation of
the viewership of Netflix and some of its rivals are mentioned below:

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FINANCIAL STATEMENT ANALYSIS
Figure 2: (Netflix Viewership in USA)
Source: (Netflix Inc 2019)
The management of Netflix has appropriately expanded the operations of the business
so that appropriate revenue can be generated and competitive pressures can be handled
appropriately. The above graph shows that the business of Netflix dominates other business
operating in the industry in terms of viewership which is shown. In an overall analysis, it can
be said that the business of Netflix is in a favorable position in terms of competitive analysis
but further progress can be made.
Competitors Analysis
The business of Netflix operates in Streamline industry and conducts its operations to
provide the best possible services to the customers. The competitors for Netflix are Amazon,
Hulu, HBO, Google which have effectively established them in the market. The barrier to
entry in the industry is low and therefore businesses can enter the industry anytime. This
allows most of new businesses to enter the market for taking advantage of the favorable
conditions in the market. A proper competitive analysis for Netflix is shown below in a form
of table:

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FINANCIAL STATEMENT ANALYSIS
Figure 3: (Competitors Analysis for Netflix)
Source: (Netflix Inc 2019)
Porter’s Five Force Model
 Bargaining Power of the Customers: The buyers have tremendously power in this
industry as they can easily leave Netflix without any consequence as there are lots of
options available to the customers (Muzumdar 2014). There are several other

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FINANCIAL STATEMENT ANALYSIS
competitors present in the market which also means that the customers have lots of
options for the purpose of entertainment. In addition to this, the subscription price for
television is also quite low in comparison to Netflix which also makes the bargaining
power of the customers quite high.
 Bargaining power of Suppliers: The suppliers are few and have licensed contracts
with Netflix which makes their bargaining power quite high. In case a original show
becomes popular the rate of the supplier also increased which is a major factor which
needs to be considered for the purpose of analysis (Dälken 2014). In such a situation,
Netflix needs to negotiate with every supplier so that the business can get the best
possible price for the shows and also for streamlining the shows.
 Substitute Products: There are lots of substitutes available for the service of Netflix
as lot of businesses are entering the market and providing more or less the same
service which makes the influence of this factor quite high in the market. In addition
to this, the barrier to entry in the market is low which is one of the reason that lot of
option is available to the users. This can directly impact the operations of the business
and directly impact the revenue of the business.
 Rivalry: The rivalry in the market is quite high which directly impacts the revenue
which is generated by the business. The existing players always tend to bring about
improvements in their user interface so that more clients are attracted to the services
provided. The management of Netflix also needs to differentiate their products which
are often done by introducing original shows in their medium so that it can capture
more market. This is also a technique which is used by the business for generating
more revenue from the operations of the business.
 Threat of New Entrants: The threat of new entrant is also high as there is no barrier
to entry which can directly impact the operations of the business. However, some

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FINANCIAL STATEMENT ANALYSIS
barrier needs to be considered such as technological barrier which can directly affect
the operations of the business and impact the revenue generation process of the
business.
Business Strategy and Model
The business strategy which is followed by the management of Netflix is to provide
appropriate services to the customers and expand the reach of the business so that more
customers can subscribe to the content. The focus of Netflix is on mass business sector so
that it can attain membership of TV appears and films expecting that it can expand the
operations and revenue with the prime number of endorsers. The management of the
company aims to enhance the operations of the business by getting more subscribers to the
services (Pfeifer and Conroy 2017). This would help the business to enhance the revenue
which is generated. The management of the company also aims to develop competitive
advantage by providing quality shows and also improving the technological level of the
interface. The business needs to frame strategies so that it can survive in the competitive
environment and further enhance the reputation of the business.

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FINANCIAL STATEMENT ANALYSIS
Figure 4: (Netflix Penetration in different Markets)
Source: (Netflix Inc 2019)
The management of the company also aims to penetrate different markets and reach
out to as many customers as possible so that maximum revenue can be generated and the
business is able to spread its name on a global basis. The above table shows that the business
of Netflix has entered or penetrated different markets which are one of the reasons that the
company is so popular.
Corporate Events
The corporate events are events which can impact the operations of the business. The
events which are shown in the official website of the business reflect the different activities
which can impact the operations of the business. The website also shows quarterly earning
reports for the business so that the performance of the business can be monitored on a regular

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FINANCIAL STATEMENT ANALYSIS
basis. The events also shows different digital conferences which the business has attended
during the period.
Analysis of the Financial Performance
The financial performance of a business is appropriately depicted in the financial
statements of the business. The income statement for the business shows that the revenue of
the business has increased significantly and the same is shown to be $15,794,341,000 in 2018
which is significantly higher than previous year. In a similar manner, the cost of revenue has
also increased which suggest that the management of the company has expanded the range of
operations during the period. The net profits for the company are shown to be $
1,211,242,000 in 2018 which is significantly higher from previous year. This shows that the
company has expanded the number of users to the portal. The balance sheet of Netflix shows
that asset base of the company has increased which is a sign that the business has followed
wealth maximization principle (Ruiz-Navas and Miyazaki 2017). The cash flow statement of
Netflix shows that cash and cash equivalents balance has increased which reveals that the
company has a healthy cash low situation which is a sign that the management can make
investments.
Ratio Analysis
FINANCIAL RATIOS 2018 2017 2016
Industry
average
in
thousands
in
thousands
in
thousands
Revenue 15,794,341 11,692,713 8,830,669
Average Total Asset 25,974,400 19,012,742 13,586,610
Total Asset Turnover Ratio 0.608 0.615 0.650 0.38
Current Liabilities 6,487,320 5,466,312 4,586,657
Cash 3,794,483 2,822,795 1,467,576
Cash Ratio 0.585 0.516 0.320 0.45
Current Assets 9,694,135 7669974 5,720,291

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FINANCIAL STATEMENT ANALYSIS
Current Liabilities 6487320 5466312 4586657
Current Ratio 1.494 1.403 1.247 0.44
Revenue 15,794,341 11,692,713 8,830,669
Cost of Revenue 9,967,538 8,033,000 6,257,462
Gross Profit 5,826,803 3,659,713 2,573,207
Gross Profit Margin (%) 36.89% 31.30% 29.14% 24.78%
Operating Profit 1,605,226 838,679 379,793
Revenue 15,794,341 11,692,713 8,830,669
Operating Profit Margin (%) 10.16% 7.17% 4.30% 19.48%
Net Income 1,211,242 558,929 186,678
Average Total Asset 25,974,400 19,012,742 13,586,610
ROA (%) 4.66% 2.94% 1.37% 5.85%
Net Income 1,211,242 558,929 186,678
Total Shareholder's Equity 5,238,765 3,581,956 2,679,800
ROE (%) 23.12% 15.60% 6.97% 13.37%
The above table shows key financial ratios for the business of Netflix and the same
covers different areas of performance. The analysis includes profitability ratios which are
shown by gross profit margin, operating profit margin. The gross profit margin and operating
profit margin for Netflix is shown to have increased which shows the intention of the
business to expand the range of services and reach out to more customers. A graphical
representation of the gross profit margin for the business is shown to below:
2018 2017 2016
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
Gross Profit Margin (%)
Gross Profit Margin (%)

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FINANCIAL STATEMENT ANALYSIS
The return on assets and return on equity is also shown to have increased from
previous year but the same is still lower to the industry average of the company. This means
that other competitors are doing well in these criteria in comparison to Netflix. The current
ratio also shows an improvement which reveals that the company has the ability to further
expand the operations of the business.
2018 2017 2016
1.100
1.150
1.200
1.250
1.300
1.350
1.400
1.450
1.500
1.550
Current Ratio
Current Ratio
The analysis further shows that the business is appropriately managing the
performance in different sectors and it also shows that the management of the company is
further looking to expand the operations so that more revenue can be generated from the
operations of the business. In an overall estimation, it can be said that the business of Netflix
is appropriately maintaining the market positioning and is looking to further expand the
revenue of the business.
Company Valuation
Company
Stoc
k
pric
e
Shares
outstan
ding
Market
Cap EV EBITDA
Net
Incom
e
Price to
Earnings
ratio
EV to
EBITDA
AMAZON.CO
M, INC 2,13
5
484,000,
000
1,033,27
7,080,00
1,028,9
57,080,
4,186,0
00,000
2,371,0
00,000
435.80 245.81

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FINANCIAL STATEMENT ANALYSIS
0 000
Walt Disney
Co 140
1,507,00
0,000
210,286,
780,000
197,036
,780,00
0
14,837,
000,000
12,598,
000,00
0 16.69 13.28
Comcast
Corporation 46
4,640,00
0,000
213,857,
600,000
103,558
,600,00
0
6,666,0
00,000
5,237,0
00,000 40.84 15.54
-
-
-
Min 16.69 13.28
Median 40.84 15.54
Max 435.80 245.81
Mean 164.44 91.54
Target
Company
Stoc
k
pric
e
Shares
outstan
ding
Market
Cap EV
Cash &
Equ
Total
debt EBITDA
Net
Income
Netflix, Inc
380.
4
451,244,
000
171,653,
217,600
160,574
,505,60
0
3,794,4
83,000
14,873,
195,00
0
1,605,226
,000
1,211,2
42,000
Mean Min Max
PE Implied
Share Price 441.40 44.81
1,169.7
8
EV/EBITDA
implied
Share Price 301.09 22.69 849.87
Current
share price 380.40
Share price 371.25
Action Undervalued

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FINANCIAL STATEMENT ANALYSIS
The above table shows application of multiples models which considers the
businesses of Walt Disney, Comcast Corporation and Amazon Inc for estimating whether the
share valuation for the business is overvalued or undervalued (Kim and Bettis 2014). The
assumptions which are taken are basically related to the share price estimates which are
considered for the companies (Lewellen and Lewellen 2016). The above table appropriately
shows that the mean value for share prices is considered for Netflix as the same is the target
company in the analysis. The estimated share price for the company should be $ 380.4 while
the actual share price is shown to be $ 371.25. This clearly shows that the stocks of the
company is undervalued considering the current market scenario.
Free Cash Flow Model
The operating activities cash flow is considered for the business of Netflix so that free
cash flow can be computed. The computation requires assessment of cost of equity which is
recognised as discounting factor for the analysis (Chen, Sun and Xu 2016). The cost of equity
is computed following CAPM method where risk free rate is considered from the market
while the market rate of return is the NASDAQ return. The Beta for the company is
considered for the business of Netflix and the same represents the risks which the business
faces. The business does not provide any dividends but a terminal growth rate of 11.48% is
considered for the purpose of this analysis (Nekhili et al. 2016). This is the basis for
computing the free cash flow for the business considering the current scenario.
Conclusion
The analysis above shows the operations for the business of Netflix during the period
considering the market trends and different factors which have an impact on the operations.
The analysis appropriately presents the external factors which need to be considered for
taking any major decisions and the same are identified by using Porter’s five forces model

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FINANCIAL STATEMENT ANALYSIS
and PESTLE Analysis. The discussion also shows review regarding the financial
performance of Netflix and how the same can be improved. The valuation process for the
company is also shown in detail by using Multiple model and Free cash flow model. In an
overall estimation, it can be said that the company is performing in an efficient manner and
the same can be anticipated to improve further in coming years.
Reference
Chen, X., Sun, Y. and Xu, X., 2016. Free cash flow, over-investment and corporate
governance in China. Pacific-Basin Finance Journal, 37, pp.81-103.
Dälken, F., 2014. Are Porter’s five competitive forces still applicable? A critical examination
concerning the relevance for today’s business (Bachelor's thesis, University of Twente).

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FINANCIAL STATEMENT ANALYSIS
Kim, C. and Bettis, R.A., 2014. Cash is surprisingly valuable as a strategic asset. Strategic
Management Journal, 35(13), pp.2053-2063.
Lewellen, J. and Lewellen, K., 2016. Investment and cash flow: New evidence. Journal of
Financial and Quantitative Analysis, 51(4), pp.1135-1164.
McDonald, K. and Smith-Rowsey, D. eds., 2016. The Netflix effect: Technology and
entertainment in the 21st century. Bloomsbury Publishing USA.
Muzumdar, P., 2014. From Streaming Vendor to Production House: NETFLIX SWOT
Analysis. Available at SSRN 2377151.
Nekhili, M., Amar, I.F.B., Chtioui, T. and Lakhal, F., 2016. Free cash flow and earnings
management: The moderating role of governance and ownership. Journal of Applied Business
Research (JABR), 32(1), pp.255-268.
Netflix Inc,. (2019). Medium Competitive Position and Analysis. [online] Available at:
https://medium.com/@vik975/netflix-inc-competitive-position-and-analysis-7ea89a4bb356
[Accessed 18 Feb. 2020].
Netflixinvestor.com. (2020). Netflix - Financials - Annual Reports & Proxies . [online]
Available at: https://www.netflixinvestor.com/financials/annual-reports-and-proxies/
default.aspx [Accessed 18 Feb. 2020].
Pant, V. and Yu, E., 2018, October. Conceptual modeling to support the “larger goal” pivot–
an example from netflix. In IFIP Working Conference on The Practice of Enterprise
Modeling (pp. 394-403). Springer, Cham.
Pfeifer, P.E. and Conroy, R.M., 2017. Valuation of Netflix, Inc. 1. Darden Business
Publishing Cases.

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FINANCIAL STATEMENT ANALYSIS
Ruiz-Navas, S. and Miyazaki, K., 2017, July. Adapting Technological Capabilities for World
Digital Business: The Case of Netflix. In 2017 Portland International Conference on
Management of Engineering and Technology (PICMET) (pp. 1-10). IEEE.
Shih, W. and Kaufman, S., 2014. Netflix in 2011.
Summers, J., Brecht, T., Eager, D. and Gutarin, A., 2016, September. Characterizing the
workload of a Netflix streaming video server. In 2016 IEEE International Symposium on
Workload Characterization (IISWC) (pp. 1-12). IEEE.
T2 2016 MPK732 MARKETING MANAGEMENT (CLUSTER B). (2016). Netflix:
Segmentation, Targeting & Positioning. [online] Available at:
https://mpk732t22016clusterb.wordpress.com/2016/08/08/netflix-segmentation-targeting-
positioning/ [Accessed 18 Feb. 2020].
Zalengera, C., Blanchard, R.E., Eames, P.C., Juma, A.M., Chitawo, M.L. and Gondwe, K.T.,
2014. Overview of the Malawi energy situation and A PESTLE analysis for sustainable
development of renewable energy. Renewable and Sustainable Energy Reviews, 38, pp.335-
347.
Appendix
Free Cash Flow Estimate
2016 2017 2018
Operating Activities (Net Cash)
(1,473,984
.0) (1,785,948.0)
(2,680,479
.0)
Additional Capital
1,000,00
0.0 3,020,510.0
3,961,85
2.0
Free Cash Flow
(473,98
4.0) 1,234,562.0
1,281,37
3.0
Average Free Cash flow

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FINANCIAL STATEMENT ANALYSIS
680,650.3
Intrinsic Value Calculation
PV of cash flow 196,995,890.21
Debt 14,873,195
Cash 3,794,483
Net Debt 11,078,712
Outstanding shares 451,244
Share Price 412.01
Current Share price 380.4
Comment Undervalued
Inputs Terminal Year 2022 - 23
Number of years considered 5 Terminal Value 338,501,989.08
FCF Growth rate for first 5 years 3.79%
PV of Terminal
Value 194,254,103.66
Terminal Growth Rate
(anticipated) 11.48%
Discount Rate 11.75%
Cash flow & Present Value Table
Sl No Year Cash flow PV of Cash flow
1 2018 - 19 706,458.61 632,191.31
2 2019 - 20 733,245.47 587,182.33
3 2020 - 21 761,048.01 545,377.78
4 2021 - 22 789,904.73 506,549.51
5 2022 - 23 819,855.62 470,485.62