Accounting Financial Analysis Report: Netflix Cash Flow

This report provides a comprehensive financial analysis of Netflix, examining its cash flow problems, implications, and potential solutions. The analysis delves into Netflix's strategy of investing heavily in original content, which has resulted in negative free cash flow and increased debt. The report explores the implications of these financial challenges, including the impact on subscriber growth, revenue, and operating margins. It also examines the company's strategies to mitigate these problems, such as corporate restructuring and debt financing. Furthermore, the report analyzes key financial ratios like debt-to-equity and leverage ratios, along with the credit rating of Netflix. The conclusion highlights the critical need for Netflix to sustain its subscriber base growth to overcome its cash flow challenges and maintain its position in the streaming market.

Running head: ACCOUNTING FINANCIAL ANALYSIS REPORT
Accounting Financial Analysis Report
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Executive Summary
Netflix Inc. is a booming industry in the streaming market. It provides documentaries, feature
films and TV series across various languages and genres. The services can be received with
the help of a host of screens connected to the internet, which include television, mobile
devices, TVs and so on. It has risked its free cash flow by burning cash to provide original
content by increasing its debt. The increase in its subscriber’s base continuously will help it
to improve its position.

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Table of Contents
Introduction................................................................................................................................3
Problems with the cash flow of Netflix......................................................................................3
Implications of the problems with the cash flow of Netflix.......................................................4
Solutions to mitigate the problems with the cash flow of Netflix..............................................4
Consequences of the strategies adopted by Netflix to mitigate the problems with the cash
flow of Netflix............................................................................................................................5
Conclusion..................................................................................................................................5

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Introduction
Netflix Inc. is the leading performer in the streaming market of the consumer cyclical
sector. It is a provider of internet entertainment services. The company operates in the
international streaming, Domestic DVD and domestic streaming segments. It has around
7000 full time employees. It was founded in the year 1997 and has its headquarter in
California. With the help of this report, the problems in the free cash flow position of Netflix
have been identified and its implications mentioned. The ways to mitigate the problems have
been analysed and the consequences of the strategies determined.
Problems with the cash flow of Netflix
The company has opted for high risk by burning its cash in producing shows like
Stranger things, which requires a lot of capital investment. It eventually gives the pay out
after many years as claimed by the CEO Reed Hastings in 2017. It is not an everlasting
phenomenon but just temporary as they are just trying to lure the customers to their services.
Despite of having regular profit intervals, Netflix has shown a negative cash flow in its
statement every year since 2011. The reason for such a negative cash flow can be attributed
to the difference in the amounts of its bottom line and cash flow. This difference arises due to
the issue in accounting, which has resulted in ongoing and huge investments in original
movies and shows. In fact, the company has seen these cash burns as a symbol of success for
them. Their strategy of original content has worked well in its success. The investors
predicted a bullish sentiment post the flexing by Netflix Inc. in the market through its
dominance. It dominated the market by increasing the prices of the enhanced and basic
packages of streaming. This led to the problem of increased debt for the company. Another
problem was the poor position of its free cash flow which now had a negative figure in its
ledger. The large amounts of money being spent on the original content and the debt side are

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helping to reveal the cash flow forecasting. The large amounts of funding for the new content
was done by debt of billions of dollars.
Implications of the problems with the cash flow of Netflix
The free cash flow of the company shows the net amount generated are from the
operations deducted by the amount invested in equipment, property and various other assets
that are long term. Such investments helps the company to spend on real cash for the content
years, before they realise the cost in their income statement. In case the company cannot
improve the cash flow position, it will be exposed to adverse risks that will impact its future
growth of earnings. The paid subscribers of the company increased by 34% from the previous
year amounting to about 8.8 million more. However, the revenue grew at a lower rate as
compared to the consensus expectation by 27%. The profit per share reduced by 30 cents
from $186 million. The operating margin dropped due to the high rate of cash burns for
launching the original contents on a regular basis. These figures should cause an alert
amongst the investors by the startling price earnings ratio of 1247 and current stock price of
$336. The balance sheet showed increase in its long term debt to 10.3 billion in 2018 from
$6.3 billion in 2017. Despite the increase in the revenue by 79%, the long term debt increased
by 90%. The company spent around $6 billion for its original content in 2017, which was $1
billion more than the previous year. It increased its original content spending by double the
amount to $12 billion in 2018. The free cash flow was at -$3 billion for the entire year.
Solutions to mitigate the problems with the cash flow of Netflix
The company has changed the corporate structure, which will help to increase the
taxes in the current year. It is further planning to invest a large amount in the real estates and
other types of infrastructure as compared to its previous year investments. The company has
approached the bond market for selling the debts in order to finance the cash deficits. Over

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the last two years, the company has been spending a large amount in the production of
original content, which helped it revoke its base of existing customers and facilitated taking
over of new members. The base for new subscribers reached around 137 million from 50
million over the last four years. The examination and analysis of the increased long term
liabilities indicate that the subscriber base of the company should keep growing. The looming
cash flow can only be recovered by the continuous increase in its subscriber base.
Consequences of the strategies adopted by Netflix to mitigate the problems with the
cash flow of Netflix
The member customer base, operating margins and revenues are all forecasted to
increase in 2020 and years following 2020. The current position of the company is
misbalanced between the increasing original content production cost and growth of the new
subscribers. The following years will help to determine if it can eliminate the debt load and
improve the cash flow position. The paid subscribers of the company increased by 34% from
the previous year amounting to about 8.8 million more. However, the revenue grew at a lower
rate as compared to the consensus expectation by 27%. The profit per share reduced by 30
cents from $186 million. The increase in long term liabilities automatically led to a decrease
in its cash flow. The offers made by the new players in the market may be or may not be an
unforeseen and potential risk.
Debt to Equity Ratio
The debt to equity ratio can be termed as the ratio that is found out through the
division of the company’s total liabilities with that of the shareholder’s equity. The figures
required for this ratio are made available in the balance sheet of the company. The ratio is
mainly used for the calculation of the financial leverage of the company. This ratio is a very
important measurement tool that is used for corporate finance. The ratio reflects the extent up

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to which the company finances its capital, whether the company is using more of its debt
capital or whether it is using more of its equity capital.
From the debt to equity ratio figure of Netflix, it can be seen that the company has decreased
its net borrowings up to 22.21%. Due to this the total debt to Equity ratio has deteriorated to
2.06%. Netflix operates within the broadcasting Media & Cable TV industry. Comparing the
performance of Netflix as compared to the other companies of the same industry, it has been
reflected that Netflix has shown less downward trend in this ratio as compared to its
competitors.
Leverage Ratio
A leverage ratio can be defined as the financial measurement of analysing the amount
of capital that comes from debt and also assesses the ability of the company for meeting up
its financial obligations.
The company has net borrowing of 11.85%. The ratio has sharply declined to 3.94%. This is
a significant decline which is above the average leverage ratio provided by the company. In
the second quarter of 2019, 33 other companies have successfully declined their leverage
ratio lower than Netflix.
Credit Rating
Credit rating is a procedure undertaken for the purpose of assessing the credit
worthiness of a borrower or an entity who is engaged in taking loans from a financial
institution. A good credit rating ensures that the entity has sufficient cash for meeting up its
loans or credit.
According to the data provided by the credit rating agency of Moody’s Investor
Service, the current round of bonds of Netflix have a Ba3 rating which is similar to the BB

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rating. This shows that the company is prone to the weak economy and the internal problems.
It is recommended that the company should pay higher interest rate to the buyers.
Conclusion
The big challenge for the company is to keep maintaining the increase in its
subscriber base to overcome its free cash flow problems. Otherwise, the company will
become the casualty of its own success. The customers are expecting an increased array of
the original content at a regular basis. The offering by its competitors will help the company
to determine whether the subscribers will switch easily to another competitor or not. The
streaming market has been increasing at a high pace. Netflix is the king of the market at
present but can br overcome by any other competitor in the future.