Financial Analysis of Netflix Inc.

This report provides a detailed analysis of recent developments in the international financial environment and their impact on Netflix. It also covers the source of finance, dividend policy, risk management strategy, and financial performance of the company.

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Table of Contents
Introduction......................................................................................................................................3
Main Body.......................................................................................................................................3
Two recent developments in the international financial environment...................................3
Impact on Netflix in near future.............................................................................................4
Source of finance....................................................................................................................4
Dividend policy......................................................................................................................5
Risk management strategy......................................................................................................5
Ratio analysis..........................................................................................................................5
Profitability ratios............................................................................................................................5
Gross profit ratios...................................................................................................................5
Net profit ratios.......................................................................................................................5
Liquidity ratios.................................................................................................................................6
Current ratios..........................................................................................................................6
Quick ratio..............................................................................................................................6
Efficiency ratios...............................................................................................................................6
Account payable turnover ratio..............................................................................................6
Asset turnover ratio................................................................................................................6
Investment ratios..............................................................................................................................6
Debt to equity ratios...............................................................................................................6
Return on equity.....................................................................................................................6
Interpretation....................................................................................................................................7
Conclusion.......................................................................................................................................9
References .....................................................................................................................................11

Introduction
Financial environment is a part of economy in which investors, firms and markets are the
major players. The mentioned sector is presented as large part of a developed economy. In the
provided report document, key considerations to operational working at Netflix, Inc. will be
taken into consideration (Jacobi and Brenner, 2018). The said firm has its existence as an
American production and streaming service company. Provided company has its existence since
1997 being founded by Reed Hastings and Marc Randolph and is headquartered in Los Gatos,
California, U.S. For the given document presentation of recent development in terms of
international financial environment will be taken into consideration. Along with this, impact on
Netflix in near future in regards to such development is being highlighted. Followed in the
provided report sources of finance and dividend policy is being mentioned in the provided
document. Lastly, risk management strategy and financial performance of the respective firm in
accordance with annual report of the company is being provided (Sénécal and George, 2021).
Main Body
Two recent developments in the international financial environment
The international financial environment refers to the functional area of businesses in
which financial activities and operations of corporate firm are being integrated. In its inclusion
of financial laws and regulations, financial system as well as supportive cultural values of an
economy is being taken into consideration. The said environment is identified as variable in
nature, thus affects various stakeholders including, investors, suppliers, financial institutions etc.
when changes occur. Recently, international financial environment have gone through drastic
changes that have manipulated operations of various businesses and changes in operational
structure of the corporate firm is also being observed (Yanardağoğlu and Turhallı, 2020).
In context of chosen company i.e. Netflix, managers of the corporate firm have observed
pandemic and digital technologies as the recent developments in international financial
environment. As mentioned by Natalie Sherman, (2020), Netflix gained 2.2 million new
subscriber for such three month. This added to the development of the company when other
businesses were in urge of survival on the other hand some have to shut-down. However,
managers at said company have to rearrange their resources and perform specific modifications
in operational working of the corporate firm (Five ways the virus has changed Netflix, 2020).

According to Neelesh Singh, (2017), Netflix have its strong existence since its
incorporation, for which various contributing factors in the company's success, digital
technology had a good hand on the company. The company since its existence of being a small
DVD rental company in 1997, have not over 100 million customers around the world. In scope
of its financials, said company displayed $9 billion in 2016 for which the figure grew 30% year
after year and GP margin over 30% (Digital transformation: What can we learn from Netflix?
2017).
Impact on Netflix in near future
There are possible several impact of such recent development in operational working of
given company. This could be in regards to structuring the core operational working at firm and
in regards to its customer dealing services. Netflix is recognised as the dominating company in
area of on-demand industry with 167 million paying subscriber around the world. The mentioned
company perform various market researches in respect to consumer behaviour and analysing the
in-depth competition in respective competitive business environment. Through the analysis
mentioned company have complied with interest of various individuals ranging from young age
to even adults (Hamilton and Webster, 2018).
Source of finance
This refers to how business get money to fund its operational functionality. In the terms
of Netflix, the major source of finance is debt rather than equity. The main reason behind
company is choosing debt to fund its operations because debt is easily available source of
finance at lower interest rate and it does not allow to share profits to outsiders such as
shareholders(Hamilton and Webster, , 2018). Second reason behind choosing debt for fund its
operations because it requires fixed interest payment annually irrespective of profit earn by firm.
Whereas, in equity source of finance, payments majorly depends upon profit of firm, if firm earn
huge profit then it has to pay good or higher returns to its shareholders(Shams and et.al 2021).
The another advantage of using debt as a source of financing is that it lowers the taxable income.
The lower the taxable income, the less tax mentioned company have to pay to government.
Hence, through all these advantages company prefer to use debt rather than equity to fund its
operations(Aguilera and Grøgaard , 2019).

Dividend policy
This describes the policy that states the amount of dividend paid out by company to its
shareholders(Barnes, 2018). In the terms of Netflix, it finance all its capital by debt source of
financing by taking loan from various financial institution and banks and firm does not require to
pay dividend to them. It pay interest to them annually irrespective of profit it earns. Therefore it
has no equity financing therefore it does not pay dividend to its shareholder(Hannibal and
Knight, 2018).
Risk management strategy
This defines as a coherent approach to identifying, assessing and managing risk of an
enterprise. It is build in a process that regularly updating and reviewing the assessment based on
new developments and actions(Collinson and et.al2020). In the terms of mentioned company ,
the company provide valuable video content to its subscribers at cheaper subscription fees. But
sometimes due its best service it would net be able to reach wider audience then it would expect.
So to cope with that risk it has outsource its business to several companies to gain customers on
behalf of that company(Buckley, Enderwick and Cross , 2018). Hence, by this outsourcing
business strategy it would lead business to diversify its business and reduce the chances of
failure. By implementing this strategy firm would reduce its chances of failure in market and
earn profitable situation(Zhao, Zhang and Kwon, 2018).
Ratio analysis
Profitability ratios
Gross profit ratios.
Formula= Gross profit/sales*100
for 2019-7.72/20.16*100-38.29%
for 2020-9.72/25.00*100=38.88%
Net profit ratios.
Formula= Net profit/sales*100
For 2019- -0.54/20.16*100=-2.67%
for 2020- -1.39/25.00*100= -5.56%

Liquidity ratios
Current ratios.
Formula= Current assets/ current liabilities
for 2019- 6.18/6.86= 0.900
for 2020- 9.76/7.81= 1.2496
Quick ratio
Formula= current assets- inventories/current liabilities
for 2019- 6.18/6.86=0.900
for 2020- 9.76/7.81= 0.900
Efficiency ratios
Account payable turnover ratio
Formula= Net credit sales/ Average accounts payable
for 2019- 20.16/1.52= 13.26 days
for 2020- 25.00/ 1.76= 14.20 days
Asset turnover ratio
Formula= net sales/ average total assets.
For 2019- 20.16/33.98=0.5932
for 2020- 25.00/39.28=0.636
Investment ratios
Debt to equity ratios
Formula= Debt/ equity.
For 2019- 15.81/11.07= 1.42
For 2020- 14.76/7.58= 1.94
Return on equity
Formula= Net income/ shareholder equity
for 2019- 20.16/7.58= 2.695%
For 2020- 25.00/ 11.07= 2.25%

Interpretation
Gross profit ratio-
The ideal Gross profit ratio of any business in considered as 65%. In 2019, the GPS is
38.29% and in 2020 the GPR is 38.88% which means that the company is not generating profit
as per industry norms. Profits of company are not in such a way that it covers the cost of
production of company. Moreover the company is also growing slowly as comparison to what
industry growing. Hence, the managers of company need to plan some strategies to boost
company's sales. For boosting sales of company, it can lower down or decrease its subscription
fees in order to increase its customer bases which would help company generate sufficient cash
flow to do it business functionality in proper way.
Net profit ratio-
The ideal 20% net profit ratio of any industry is considered good. In 2019, the net profit
ratio is -2.67% and in 2020 it is -5.56% which shows that company's financial position is very
bad after paying all taxes and legal liabilities. Hence, managers of company need to take some
urgent decision and plan some strategies to increase net profit ratio otherwise this result in
liquidation in firm. By concerning about present situation it can launch several services to attract
customer to purchase its subscription fees which would help to rise in net profit of firm and led
to achieve profitable situation in market place.
Current ratio
The ideal current ratio of any company is 1:2, which shows that company is earning
enough money to pay off its creditors. But in Netflix, current ratio of 2019 is 0.900 which
indicates that company is not earning enough money to pay of its creditors. In 2020, this ratio is
1.2496 which indicates that by concerning about past situation managers have adopt suitable
strategy and improved their organisation performance which lead to increase their current ratio
and shows that company is earning enough money to pay its creditors. By increasing its current
ratio to its benchmark company can adopt suitable strategies like lowering down its subscription
fees to increase its profit in sufficient way to that it can pay its creditors in timely way which
would increase goodwill of firm in market.
Quick ratio
The idea ratio for any company is 1, which indicates that company is earning enough
money to pay off to its creditors in short time. But in 2019 and 2020 both years the ratio is 0.900

which indicates that company is not earning enough money to pay off to its creditors in short
time. Therefore, managers of company have to adopt suitable strategies to selling its product in
market which help company to generate sufficient cash inflow and help to pay its creditors in
short time. For improving quick ratio of mentioned company ,can lower down its subscription
fees or it can give several other facilities to customer so that customer would attract to buy
subscription plan of Netflix. Hence through this strategy company can improve its quick ratio
and would be able to reach its benchmark level.
Accounts payable turnover ratio
This ratio indicates how many times a company pay off its account receivable during a
period. Shorter the times better the company is able to pay off its short term debts. In terms of
mentioned company, this ratio was 13.26 times in 2019 and in 2020 this ratio is 14.20 times. An
increasing in ratio indicates that in previous year company used to settle its short term debts in
13 days whereas in 2020 it took 14 days. Hence, managers of an organisation should plan some
strategies to reduce its accounts payable turnover ratio other wise this would impact the market
value of company in long term. For reducing its ratio, company has to do aggressive level of
marketing so that customers in market would get to know about latest charges and scheme
launched by customer. This would help company to earn sufficient money to pay off to its
creditors on time.
Asset turnover ratio
This ratio indicates the value of company' sales or revenue relative to its value of assets.
The ideal asset turnover ratio which is considered best is 2.5 or more. In the terms of mentioned
company, the asset turnover ratio in 2019 was 0.5932 and in 2020 it was 0.636. This indicates
that company is not utilizing its assets in proper value to rise its sales. Therefore, managers of
company should adopt some suitable strategies by which they can use their assets in proper way
to rise in revenue or sales of an organisation. Otherwise it can badly impact the profitability of
company. For increasing this ratio, company should take proper use of its assets in all aspects.
Assets should include include like cash for proper business functionality for increasing sales.
Hence, by this strategy company can increase their assets turnover ratio up to its benchmark
level.
Debt to equity ratio

This ratio indicates the proportion of debt and equity in capital structure of firm. The debt
to equity ratio which falls around 1 to 1.5 is generally considered good for firm. In the terms of
Netflix, in 2019 this ratio was 1.42 whereas in 2020 this ratio was 1.94. This ratio is higher that
benchmark which indicates that company is relying more on debt rather than equity to fund its
operation. Hence, managers of an organisation should adopt some strategies to reduce the
proportion of debt. For reducing the proportion of debt and increasing the proportion on equity in
their capital structure, company can issue IPO(Initial Public offering) which would help
company to reduce its debt portion as they can raise money form public in market. This would
help company to increase its debt to equity ratio and to reach till benchmark.
Return of equity
This ratio indicates that how effectively company is using shareholder money to generate
profit for firm. In other words, it also indicates how much profit a company is earning from each
dollar of shareholder's equity. The benchmark of this ratio is 15-20% is generally considered
good. In the terms of mention company, in 2019 the return of equity ratio was 2.695% whereas
in 2020 it was 2.25% which indicates that company is not utilizing its shareholder wealth
properly properly. Hence, managers or top level seniors of an organisation must plan some
suitable strategies or need to take some actions in utilizing the shareholder wealth in company's
operation. For increasing its return of equity till its benchmark, company can solely depend upon
upon equity source of financing rather than debt source of financing for doing its business
operation. By completely depending upon equity source of financing it would leave no option for
company other than equity to finance its operation. By that money company can do all its
business functions properly by without relying upon debt. Hence this would help company to
increase its return on equity so that it can reach till its benchmark.
Conclusion
On the basis of above report its has concluded that there have been various developments
gain by company in international environment. Pandemic and digital technologies are considered
as major reason behind such development, as a result it has gained 2.2 million new subscriber in
three months. This helped company to gain success and profitability in market when other
companies were struggling. Moreover this would help company to gain good amount of
subscribers in near future. It has also been discussed that what source of finance does company
use to fund its operations and how it could impact the overall profitability of firm. Moreover,

what type of dividend policy have been applied by company to pay dividend to its shareholder. It
has also been discussed that how firms plan suitable strategies to manage its risk in organisation.
Various types of ratios have also been calculated by taking financial figures from financial
statements of company which comprises of income statement, balance sheet and cash flow
statement and later interpretation has also been drawn on the basis of output of ratios. By making
suitable interpretation firm can take relevant actions to increase their those ratios which are not
as per benchmark level and led to rise in profitability of an organisation.

References
Books and Journals
Hamilton, L. and Webster, P., 2018. The international business environment. Oxford University
Press.
Jacobi, R. and Brenner, E., 2018. How large corporations survive digitalization. In Digital
marketplaces unleashed (pp. 83-97). Springer, Berlin, Heidelberg.
Sénécal, M. and George, É., 2021. Canadian Communication Policies in the Post-Netflix
Era. The Values of Public Service Media in the Internet Society, pp.155-172.
Yanardağoğlu, E. and Turhallı, N., 2020. From TRT to Netflix: Implications of Convergence for
Television Dramas in Turkey. In Television in Turkey (pp. 189-204). Palgrave
Macmillan, Cham.
Hamilton, L. and Webster, P., 2018. The international business environment. Oxford University
Press.
Shams, R., Vrontis, D., Belyaeva, Z., Ferraris, A. and Czinkota, M.R., 2021. Strategic agility in
international business: A conceptual framework for “agile” multinationals. Journal of
International Management, 27(1), p.100737.
Aguilera, R.V. and Grøgaard, B., 2019. The dubious role of institutions in international business:
A road forward. Journal of International Business Studies, 50(1), pp.20-35.
Hannibal, M. and Knight, G., 2018. Additive manufacturing and the global factory: Disruptive
technologies and the location of international business. International Business
Review, 27(6), pp.1116-1127.
Collinson, S., Narula, R., Qamar, A. and Rugman, A.M., 2020. International business. Pearson
UK.
Buckley, P.J., Enderwick, P. and Cross, A.R. eds., 2018. International business. Oxford
University Press.
Zhao, H., Zhang, F. and Kwon, J., 2018. Corporate social responsibility research in international
business journals: An author co-citation analysis. International Business Review, 27(2),
pp.389-400.
Barnes, D., 2018. Operations Management. Macmillan International Higher Education.
Online
Five ways the virus has changed Netflix, 2020. [Online]. Available at:
<https://www.bbc.com/news/business-54623959>
Digital transformation: What can we learn from Netflix? 2017. [Online]. Available at:
<https://inform.tmforum.org/features-and-analysis/2017/03/digital-transformation-can-
learn-netflix/>
Annual reports of Netflix: Morningstar, Inc, 2021.[Online]. Available at:
<https://www.morningstar.com/stocks/xnas/nflx/financials>