Situation Analysis Of Shale Gas Industry

Running head: FINANCIAL STATEMENT ANALYSIS
FINANCIAL STATEMENT ANALYSIS
Name of the Student
Name of the University
Author Note

1FINANCIAL STATEMENT ANALYSIS
Executive Summary
Netflix is one of the largest firms in the world operating in the entertainment and mass media
industry on a worldwide basis. It works on a subscription based business model providing the
best in class entertainment to its users on demand. It provides a wide-range of online library
comprising of numerous movies, television shows and original content. The aim of the report
is to provide an inside on Netflix’s financial data. The aim is accomplished through a
thorough analysis comprising of financial ratios, trend analysis, company valuations based on
dividend models and free cash flow model.

2FINANCIAL STATEMENT ANALYSIS
Table of Contents
Tear Sheet...................................................................................................................................3
Company profile.........................................................................................................................4
Macro-economic analysis...........................................................................................................5
Industry analysis.........................................................................................................................8
Competitor analysis....................................................................................................................9
Business model and corporate strategy....................................................................................11
Analysis of financial statements...............................................................................................11
Ratio analysis.......................................................................................................................11
Trend analysis......................................................................................................................14
Company valuation..............................................................................................................15
Conclusion................................................................................................................................17
References and bibliography....................................................................................................18

3FINANCIAL STATEMENT ANALYSIS
Tear Sheet
Basic Financial profile
Last closing price of Netflix: $364.08 (02 April, 2020)
52- Week high and low: high- $387.78 (18 Feb, 2020), low- $254.59 (24 Sep, 2019)
Market capitalization: $164.77 Billion (01 April, 2020)
Total shares outstanding: 435374 shares (2018)
Enterprise value: $174.51 billion (01 April, 2020)
Beta of the stock: 1.23
Estimates
Sales: $15794341 million (2018)
EBITDA: $1226458 million (2018)
EPS: $2.78 (2018)
Employee data: 6700 employees (2019)
Abbreviated Financials
Gross profits: $5826803 million (2018)
Net Income: $1211242 million (2018)
Total Assets: $25974400 million (2018)
Total Liabilities and Shareholder’s Fund: $25974400 million (2018)

4FINANCIAL STATEMENT ANALYSIS
Company profile
Netflix, INC. is one of the world’s largest media services provider company that has
it’s headquarter located in Los Gatos, California. It was founded by Marc Randolph and Reed
Hastings in 1997 and since then it has grown in size manifold and became one of the largest
media services company throughout the world (S22.q4cdn.com 2019). It has its operations
spread throughout the world except Syria, North Korea, Mainland China and Crimea owing
to sanctions imposes by the Government of U.S.A. It has its production hubs located at New
Mexico, New York City, Buckinghamshire, U.K. and Madrid, Spain. It operates in the mass
media and entertainment industry that deals in film, television and web-series production and
distribution. It is one of premier members of the “Motion Pictures Association (MPA). It
operates in different parts of the world through regional offices located in Brazil, South
Korea, India, The Netherlands and many more. It popularizes its business through free
subscriptions to new users for a month and post which paid subscriptions starts. As per the
records, Netflix have paid subscriptions over 167 million where the United States alone
accounts for 60 million subscribers and users on free trial accounts over 154 million.
Netflix initially started business with DVD sales and rented service which was sent
over mail. Netflix started with its new business idea in 2007, where it entered into streaming
media business (Netflixinvestor.com 2020). It was relatively new idea by that time and took
considerable time till 2010 to popularize and since then Netflix have never looked back. In
2010, Netflix was pursuing its two line of businesses, one it was trying to establish its new
idea of streaming media business and at the same time retaining its old business of Blu-ray
and DVD rental business. As of 2010, it had entered into streaming of its contents not only in
the United States but also spreading its petals in different countries like the Canada,

5FINANCIAL STATEMENT ANALYSIS
Caribbean and the Latin America. It entered into the content production industry by 2012
developing its first series- “Lilyhammer.” Netflix in its revolutionary time did not restrict
itself into Television series and Films but also involved itself into one more innovative idea
of “Netflix Original” contents which was streamed exclusively in its online library along with
other produced films and television series. As of 2016, it had entered into more than 190
countries, offering more than 126 Original Series and numerous films unlike any other
existing cable networks or channels. It soon became popular offsetting many other rival firms
operating in the same industry anywhere within its 190 country of operation. Understanding
the need and preference, it started to develop and produce regional contents as well along
with its international content and owing to this it had incurred a total long-term debt of $21.9
billion as of 2017 and had taken another long-term debt of $2 billion which will fund its
newly announced projects in 2018 (S22.q4cdn.com 2018). The debts might look too high
however, the trend suggests that it has a great potential to raise at least double revenue than
its investment. As of 2020, it had close to 3000 film titles under its belt for streaming in
U.S.A.
Macro-economic analysis
Macro-economic analysis can be effectively done with the help of four major factors
that forms the part of the PEST analysis which stands for Political factors, Economic factors,
Social factors and Technological factors (BOGA 2019). These factors that defines and
analyses Netflix’s macro-economic environment are as follows:
Political factors
Political factors are considered as one of the important factor that impacts the
business, its profitability and market orientation to a great extent (Vogel 2014). Netflix has its
operations spread over 190 countries around the world and owing to its operation it has to

6FINANCIAL STATEMENT ANALYSIS
confront a number of political environments as well as it is exposed to a number of political
risks. Therefore in order to have a stability, especially in its abroad business operations, it has
to analyze a number of political factors that might affect its business operations, which are as
follows:
 Political stability of the country in which it has spread or will be spreading its
operation.
 Corruption level.
 Military invasion risk.
 Level of bureaucracy and government intervention in the content streaming business.
 Legal framework concerning enforcement of contracts.
 Protection of Intellectual property rights.
 Tariffs and trade regulations.
 Anti-trust laws concerning its business.
 Regulations relating to pricing policies and strategies.
 Taxation laws stating applicable incentives and tax rates.
 Wage regulation policy or applicable labor laws containing minimum wage rate and
overtime payment rules.
 Any mandatory benefits that are to be provided to the employees.
 Regulations concerning Industrial safety.
Economic factors
Economic factors are those factors like the Inflation rate, interest rate, savings rate,
foreign exchange rate, economic cycle and many others that determine the aggregate demand
and supply and at the same time have the power to affect the business economically in terms

7FINANCIAL STATEMENT ANALYSIS
of heavy influence on the value of its future investment. The economic factors that re of
utmost importance for Netflix are as follows:
 The type of economic system that is prevailing in the country of operation
(Vaddepalli and Antoney 2018).
 The level of government intervention in the free market operation of demand and
supply.
 Prevailing exchange rates and its stability with major currencies of the world.
 Efficiency of domestic capital markets to get an idea about raising capital from
domestic capital markets.
 Quality of infrastructure in the cable TV as well as in the online streaming industry.
 Education level of economy.
 Workforce skillset and level of competence to work in the content streaming industry.
 Labor cost trends of the economy along with its corresponding productivity levels.
 Stage of business cycle that the economy is going through.
 Rate of economic growth.
 Rate of unemployment.
 Per capita income of citizens.
 Inflation and interest rates.
Social factors
Culture of the society and its way to see and do things greatly impact the business
within the country especially when the business activity relates to the taste and preference of
the audience. Therefore, the social factors that the marketers of Netflix should keep in mind
while formulating long-term strategies for the company are as follows:
 Prevailing culture, power structure and hierarchy within the society.

8FINANCIAL STATEMENT ANALYSIS
 Demographic structure and skill level prevailing within the society.
 Prevailing education level within the society.
 Social conventions.
 Nature of the society to understand whether it is entrepreneur friendly or not.
 Leisure interests.
 Social attitudes concerning environmental and health consciousness.
Technological factors
Technological factors are those factors or variables that helps in evaluating the
available alternatives a choosing the best alternative that suits the present and future business
needs. The major technological factors that the marketers of Netflix should keep in mind
while formulating its long-term strategies are as follows:
 Recent developments in the technology which can be used by Netflix.
 Technology used by its competitors.
 Cost structure associated with such technologies.
 Probable impact of modern technology on its product offerings.
 Technological diffusion rate.
Industry analysis
Netflix is the market leader that provides online media “streaming video on demand
(SVOD)” services operating within the mass media and entertainment industry. It operates
within this industry in over 190 countries. It is characterized by a direct revenue model. Its
subscriber are allowed to watch all its online library contents online in consideration for their
subscription. It provides more than 3000 movies, T.V. shows, and original content on demand
of its users who can access such contents anytime anywhere with an active internet

9FINANCIAL STATEMENT ANALYSIS
connection accessed from a number of devices like desktop, mobile devices like laptops,
smartphones, tablets and many more.
It is considered as one of the pioneers in this online streaming industry with a number
of new companies following its footsteps in recent years and this is why it is the most
successful company in this industry and is often considered as the market leader as well
(Anwar and Hasnu 2016). It operates in an industry that is expected to generate a revenue of
over $82 billion by 2023 growing at a rate of 17% annually between 2017 and 2023. This a
industry where there is no blockage in entry of new firms in the worldwide market except
some regulations imposed on some specific contents by some individual governments where
these firms operates. However, it should be noted that its competitors are relatively new and
will take much time to reach its popularity which is already established and its prospect in
this business is also looking very good owing to immense possibility of the growth of this
industry.
Competitor analysis
Competitor analysis is an assessment of the firm’s competitors, its strengths and
weaknesses through which the firm analyses the present and future level of competition it
will face thereby helping it to formulate effective marketing strategy to enhance its sales and
solidify its market standing (Guo et. al. 2017). The Porter’s five forces model can be
identified as an effective tool to carry out Netflix’s competitor analysis, which are as follows:
Threat of new entrants
The threat of new entrants in the online entertainment and mass media industry is
considered to be moderate. This is an industry which is characterized by a good prospect of
growth in the recent years with an expected revenue to be over $82 billion by 2023 and there
is no restriction for new firms to enter this industry. This industry saw entrance of many new

10FINANCIAL STATEMENT ANALYSIS
firms over the years like Crave and Shomi TV in Canada in 2014, and HBO and CBS
launched its online streaming platforms in the U.S.A. as well in late 2014 and many more
post that worldwide.
Bargaining power of buyers
Bargaining power of customers means the ability of the customers to buy the
available products. Netflix offers a high a bargaining power to all its customers (Adom,
Nyarko and Som 2016). The existing customers can cancel their subscriptions any time
without any lump sum cancellation fees and above all the details of the customers are saved
with it for the next one year and they can re-subscribe anytime within the year in a hassle-free
way unlike any of its competitors. These attractive features adds up to its existing popularity.
Threat of substitute products or services
Netflix has gained massive popularity over the years however there are companies in
the market which provides alternate or substitute products and services like other digital
platforms, DVD rental services, cable television services and many more.
Bargaining power of suppliers
Bargaining power of suppliers relates to power of suppliers to negotiate with its
buyers to whom it intends to sell its products. Bargaining power of Netflix’s suppliers are
also quite high. Netflix buys broadcasting licenses from its suppliers of TV shows or films
who charges a good amount of consideration for it and unless their demands are met, Netflix
cannot air their programs (Yunna and Yisheng 2014). They might withdraw their licenses as
well like Viacom did in 2013.
Competitive rivalry

11FINANCIAL STATEMENT ANALYSIS
Digital streaming entertainment industry in recent years have seen entrance of many
new firms other than its pioneer, Netflix. It has got many competitors like Shomi, Crave TV,
Hulu, Amazon Prime, YouTube along with other regional channels and cable networks
(Indiatsy et. al. 2014). So, it can be concluded Netflix experiences a tough competition from
all other digital and cable TV platforms operating within the mass media and entertainment
industry.
Business model and corporate strategy
Netflix works on “subscription based” business model where it generates its revenue
using three plans- basic, standard and premium. It gives it customers a wide range of choices
of online contents to choose from relating to movies, TV shows and original series (Bereznoi
2015). On the other hand, its corporate strategy is simple and very effective. Its corporate
strategies mainly includes acquiring more and more titles for its online streaming and also
investing more capital for developing more original content basically to acquire new
subscribers and restore existing loyal customers.
Analysis of financial statements
Ratio analysis
Current ratio: The ability of a company to meet its short-term obligations is signified by
current ratio (Garanina and Belova 2015). The current ratio of Netflix in 2018 is 1.49 against
the industry standard of 2:1, however, the current ratio have enhanced as compared to 2017,
1.40 which signifies that Netflix have become more capable to meet its short-term liabilities
than last year.
Quick ratio: It is a more accurate measure of the firm’s ability to meet its short-term
liability. The quick ratio of Netflix for the year 2018 is 0.70 against the industry standard of
1:1 signifying that it does not have enough resources leaving the inventories to pay off the

12FINANCIAL STATEMENT ANALYSIS
current liabilities. However, it has enhanced from 0.61of 2017 showing improvement in its
current assets to pay its short-term liabilities.
Gross Profit ratio: The Gross Profit ratio of Netflix in 2018 is 36.89% against 31.30% in
2017. This signifies that there has been a better maintenance of Cost of revenue as compared
to last year.
Net Profit Ratio: It demonstrates the profitability of the company after deducting all the
expenses. The Net Profit ratio of Netflix in 2018 is 7.67% as compared to 4.78% in 2017
signifying a better management of expenses by the management (Khaldun and Muda 2014).
Return on Assets: The Return on Assets of Netflix in 2018 is 4.66% against 2.94% in 2017
signifying efficient utilization of assets as compared to last year.
Return on Investment: The Return on Assets of Netflix in 2018 is 23.12% against 15.60%
in 2017 and compared to industry standard of (10-14) % signifying efficient utilization of
equity investment as compared to last year (Tulsian 2014).
Earnings per share: The Earnings per share of Netflix in 2018 is 2.78% against 1.29% in
2017 signifying a rise in net income as compared to last year.

13FINANCIAL STATEMENT ANALYSIS
Debt-Equity ratio: The Debt-Equity ratio of Netflix in 2018 is 283.91% against 252.62% in
2017 signifying Netflix has more debt capital than equity. However, the common investors
need not worry as Netflix is taking this debt to finance new projects which once gets
streamed will generate better financial results than before.
Debt ratio: The Debt ratio of Netflix in 2018 is 57.26% against 47.59% in 2017 signifying a
rise debt as compared to last year (Islam 2014). It states that Netflix has purchased majority
of its assets in the form of patents and licenses using debt capital.

14FINANCIAL STATEMENT ANALYSIS
Inventory turnover ratio: The Earnings per share of Netflix in 2018 is 2.10% against 1.99%
in 2017 relating to industry standard of 6, signifying a slow movement of inventories or
online content.
Payables turnover ratio: The Earnings per share of Netflix in 2018 is 21.60% against
23.89% in 2017 signifying a smooth flow of payments to its creditors or to license holders
(Evans and Mathur 2014).
Trend analysis
The trend of Netflix’s data over a period of two years ranging within 2017 and 2018
depicts a positive trend for Netflix in its upcoming years in the entertainment and mass media
industry. The sales revenue has enhanced by a considerable amount thereby enhancing its
Gross Profit by 59% and Net Profit by 117%. These two principal parameters depicting the
growth of Netflix is showing positive trend for the years to come.

15FINANCIAL STATEMENT ANALYSIS
Company valuation
Dividend discount model
This model helps to find out the fair value of the dividend stock. Here in the case of
Netflix, we assume two scenarios, one the company has declared no dividend, hence expected
dividend in future is 0 and the company has no annual dividend.
If the company has no dividend then by using the DDM (Lazzati and Menichini 2015)
the price of stock would be zero, because it is not a dividend stock. Whereas if we assume,
expected dividend is 2.42 then the fair value could be -9.61, so it is undervalued in its
position.
Zero growth model
Similarly if the annual dividend is zero then the price is also 0, this model implies that
there is no growth in dividend. But if we assume annual dividend to be 18.2 then, the price

16FINANCIAL STATEMENT ANALYSIS
would be $105.45. Since there is no growth we need not to deduct the growth rate to get the
share value (Rosenbaum 2015).
Constant growth model
If there is a certain growth in dividend, which is 37.7% then the price would be -
91.41. It shows undervalued price. If there is no dividend, the price would be zero.
Free cash flow model
FCFF, free cash flow to firm uses weighted average cost of capital to find the total
value of the firm. Here Netflix value by using the FCFF technique is 1760542 m.

17FINANCIAL STATEMENT ANALYSIS
Conclusion
From the above calculation and analysis of Netflix’s data over a period of two years
ranging between 2017 and 2018 shows some positive results for the years to come. It can be
concluded that Netflix has invested huge amounts taking heavy debts as depicted by the
financial ratios will reap positive results for the market leader in the entertainment and mass
media industry. The growth rate of the firm is also quite good as depicted by the
enhancement of the valuation of the firm as well. So it can be concluded that Netflix is a firm
with positive future.

18FINANCIAL STATEMENT ANALYSIS
References and bibliography
Adom, A., Nyarko, I. and Som, G.N., 2016. Competitor analysis in strategic management: Is
it a worthwhile managerial practice in contemporary times. Journal of Resources
Development and Management, 24.
Anwar, J. and Hasnu, S.A.F., 2016. Business strategy and firm performance: a multi-industry
analysis. Journal of Strategy and Management.
Bereznoi, A., 2015. Business model innovation in corporate competitive strategy. Problems
of Economic Transition, 57(8), pp.14-33.
BOGA, F., 2019. The macro-economic impact of electronic commerce. An empirical study
on how e-commerce can foster countries' economic growth.
Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: The
financial statement analysis (FSA) approach. Research Journal of Finance and
Accounting, 5(5), pp.81-90.
Evans, J.R. and Mathur, A., 2014. Retailing and the period leading up to the Great Recession:
a model and a 25-year financial ratio analysis of US retailing. The International Review of
Retail, Distribution and Consumer Research, 24(1), pp.30-58.
Gacus, R.B. and Hinlo, J.E., 2018. The Reliability of Constant Growth Dividend Discount
Model in Valuation of Philippine Common Stocks. International Journal of Economics &
Management Sciences, 7.
Garanina, T.A. and Belova, O.A., 2015. Liquidity, cash conversion cycle and financial
performance: case of Russian companies.

19FINANCIAL STATEMENT ANALYSIS
Guo, L., Sharma, R., Yin, L., Lu, R. and Rong, K., 2017. Automated competitor analysis
using big data analytics. Business process management journal.
Indiatsy, C.M., Mwangi, M.S., Mandere, E.N., Bichanga, J.M. and George, G.E., 2014. The
application of Porter’s five forces model on organization performance: A case of cooperative
bank of Kenya Ltd. European Journal of Business and Management, 6(16), pp.75-85.
Islam, M.A., 2014. An analysis of the financial performance of national bank limited using
financial ratio. Journal of Behavioural Economics, Finance, Entrepreneurship, Accounting
and Transport, 2(5), pp.121-129.
Khaldun, K.I. and Muda, I., 2014. The Influence Of Profitability And Liquidity Ratios On
The Growth Of Profit Of Manufacturing Companies A Study Of Food And Beverages Sector
Companies Listed On Indonesia Stock Exchange (Period 2010-2012).
Lazzati, N. and Menichini, A.A., 2015. A dynamic approach to the dividend discount
model. Review of Pacific Basin Financial Markets and Policies, 18(03), p.1550018.
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.
Netflixinvestor.com, 2019. Netflix - Financials - Annual Reports & Proxies. [online]
Netflixinvestor.com. Available at: <https://www.netflixinvestor.com/financials/annual-
reports-and-proxies/default.aspx> [Accessed 2 April 2020].
Netflixinvestor.com, 2020. Netflix - Overview - Profile. [online] Netflixinvestor.com.
Available at: <https://www.netflixinvestor.com/ir-overview/profile/default.aspx> [Accessed
4 April 2020].

20FINANCIAL STATEMENT ANALYSIS
Rosenbaum, E., 2015. Zero growth and structural change in a post Keynesian growth
model. Journal of Post Keynesian Economics, 37(4), pp.623-647.
S22.q4cdn.com, 2018. ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2017.
[ebook] Netflix, INC. Available at:
<https://s22.q4cdn.com/959853165/files/doc_financials/annual_reports/0001065280-18-
000069.pdf> [Accessed 4 April 2020].
S22.q4cdn.com, 2019. ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2018.
[ebook] Netflix, INC. Available at:
<https://s22.q4cdn.com/959853165/files/doc_financials/annual_reports/2018/Form-
10K_Q418_Filed.pdf> [Accessed 2 April 2020].
Slideshare.net, 2020. A Porter's Five Forces Analysis Of Netflix. [online] Slideshare.net.
Available at: <https://www.slideshare.net/ShannonPickering1/netflix-five-forces-analysis>
[Accessed 3 April 2020].
Tulsian, M., 2014. Profitability Analysis (A comparative study of SAIL & TATA
Steel). IOSR Journal of Economics and Finance (IOSR-JEF), 3(2), pp.19-22.
Vaddepalli, S. and Antoney, L., 2018. Are economic factors driving Bitcoin transactions? an
analysis of select economies. Finance Research Letters, 163(12), pp.106-109.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.

21FINANCIAL STATEMENT ANALYSIS
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.