Group-2-Report - Analysis of Netflix financial position.

NATIONAL ECONOMICS UNIVERSITY

ASSIGNMENT REPORT

of

Corporate Finance 1

FINANCIAL STATEMENTS ANALYSIS

OF NETFIX, INC

Hanoi, Mar 2020

Table of Contents

would rather sit at home and watch their movies from the comfort of their couch, something that Blockbuster did not agree with.

 Blockbuster was Netflix’s competition in the 1990s, they believed that

Netflix’s theory is wrong and that people still preferred to go to the store and purchase their movies, which later lead to the bankruptcy of Blockbuster and their extinction. ( Grace, Darothee, & Holly, 2014 ).

c. Competitors

Top companies by revenue for the "Motion Pictures", 2019

Rank Company Revenue ($ millions)

#1 Netlix, Inc 20,

#2 AMC Entertainment Holdings, Inc 5,

Lions Gate Entertainment Corp 3,

 AMC Entertainment Holdings, Inc

Founded in 1920 and headquartered in Leawood, Kansas, for market-share

context - AMC is not only America’s largest theater chain by locations in the US

but the largest in the world. The company owns, operates, or has interests in

theatres. As of March 12, 2021, it operated approximately 1000 theatres and

10,700 screens in the United States and internationally.

In 2019 it became the first theater to take a stab at home entertainment by

launching on-demand movies and TV shows.

Much has already been written about the battle between Netflix and Movie

Theaters. In short, Netflix would like to premiere a movie in theaters and on its

streaming platform simultaneously, known as a “day-and-date” release. That

would increase Netflix revenues while providing flexibility for consumers to see

what they want, where they want, at a price they want.

Theaters have resisted because they feel, rightly so, that a concurrent

theater and streaming launch will cut into their business. As a safeguard, large

theater chains (including AMC) demand a 90-day window for a film to be shown

in theaters before it is available in the home. They enforce this with boycotts.

Research studies suggest that between 13% to 28% of people prefer seeing

a film the first time in theaters instead of streaming. If we use 15% on the

conservative end of this range, and apply it to 576 million people who streamed

these 5 films, it leaves us with an estimated 86 million people who might have

preferred to watch these movies in theaters. At an average ticket price of about

$9 in 2019, that’s a box office of $791 millions.

 Lions Gate Entertainment Corp

The company was founded in 1986 and is headquartered in Santa Monica,

California. Lions Gate Entertainment Corp. engages in motion picture production

and distribution, television programming and syndication, home entertainment,

interactive ventures and games, and location-based entertainment operations in

Canada, the United States, and internationally. Lionsgate has large output and

fluctuating at 14% range. The above figures show that the company always ensures

a certain amount of reserve money, including the amount of cash in the fund as

well as bank deposits to meet the payment needs of customers and pay salaries for

employees of the company.

0% 2019 2018 2017

10%

20%

30%

40%

50%

60%

70%

80%

90%

18%

37% 40%

0%

81%

62% 59%

0% Total current assets Long-tem assets

Cash: Netflix ended 2017 with approximately 2 million in cash. Over the next 2 years, the company ballooned its cash position to approximately $ billion. This shows that the firm is holding excess cash as compared to investing the funds in short-term investments. Unfortunately, this is not the best strategy for cash management. Resources such as cash can lead to future economic benefit. Accounts Receivable and Inventory: Because Netflix does not sell products or services through other entities, the organization has no, or very little, Accounts Receivable or inventory items. Property plant and equipment: Netflix has steadily increased its property plant and equipment over the last five years. The average growth rate is about 30% annually. This indicates that the firm needs substantial property and equipment to support its growth needs. From this assessment, investors should expect this line item to maintain its growth rate until revenue levels off.

Chart Title

Netflix,Inc AMC Lions Gate

2. Liabilities & Shareholders' Equity

• I – Introduction ..............................................................................................................
  • 1 – Purpose of the report ............................................................................................
  • 2 – Overview ................................................................................................................
• II – Analysis ....................................................................................................................
  • A. Balance sheet ........................................................................................................
    • 1. Assets .................................................................................................................
    • 2. Liabilities & Shareholders' Equity......................................................................
  • B. Income Statement ................................................................................................
  • C. Cash Flow .............................................................................................................
  • D. Financial Ratios ....................................................................................................
    • 1. Liquidity ratios...................................................................................................
    • 2. Solvency ratios...................................................................................................
    • 3. Profitability ratios...............................................................................................
    • 4. Acivity ratios......................................................................................................
    • 5. Valuation ratios...................................................................................................
  • E. The DuPont system ..............................................................................................
• III – Conclusion ..............................................................................................................
• IV – Reference ................................................................................................................
  • 1. Netflix, Inc.............................................................................................................
  • 2. AMC Entertainment Holdings, Inc........................................................................
  • 3. Lions Gate Entertainment Corp.............................................................................
• 1,000.
• 2,000.
• 3,000.
• 4,000.
• 5,000.
• 6,000.
• 7,000.
• 8,000. - 5018. - 454. - 2097. - 3794. - 362 418. - 2822. - - 265 160 319. - 7445. - 313 183. - 3039. - 310 204. - 3116. - 184. - 647. - 155 378. - - 161 321. - 908. - 165.

5,000.

10,000.

15,000.

20,000.

25,000.

2019 2018 2017

Revenue increased from 2018 to 2019 which positively impacted the gross profit. Gross profit is a measure of how efficient the company is in using resources to deliver their service. The gross profit of 2018 was $5,826,803 and increased to $7,716,234 in 2019. This increase in gross profit demonstrates that Netflix was able to produce their service more efficiently in 2019 which is good for the company financially.

As a percentage of revenues

Fiscal year Jan-Dec Change 2019 2018 2017 2019 vs 2018 2018 vs 2017

Netflix , Inc COGS 61% 63% 65%

2,472.

0

25% 2,307.

0

30

%

AMC

COGS 36% 36% 36%

-3 -0% 125 7%

Lions Gate COGS 55% 55% 59%

-281 -12% 405 21

%

2019 2018 2017 0%

10%

20%

30%

40%

50%

60%

70%

COGS (as apercentage of Sales)

Netflix, Inc COGS AMC COGS Lions Gate COGS

Netflix, Inc AMC Lions Gate

-15%

-10%

-5%

0%

5%

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15%

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30%

COGS change

2019 vs 2018 2018 vs 2017

The increase in COGS for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily due to a $1,684 million increase in content amortization relating to our existing and new streaming content, including more exclusive and original programming.

Ratio 2019 2018 2017 Current ratio 0 1 1. Quick ratio 0 1 1. Cash ratio 0 0 0.

0.

1

Chart Title

Netflix, Inc Industry (median) With its cash ratio lower than 1, we can imply that the company in 2017 didn’t have enough cash to cover its current liabilities. But Netflix did have a quite good current ratio and quick ratio; both of 1 which means overall they were able to satisfy the company’s current bills. In comparison with the average industry’s financial ratio in U, Netflix was quite better off in 2017 because all of its ratio is higher than average (the average ratio is 0; 1; 0. respectively). In 2018, Netflix faced the same problems as 2017 as they did not have enough cash to cover current liabilities of the company but overall they can still pull it off as the current ratio and quick ratio were proven to be still good enough. All the ratio were making a raise. Cash ratio rise from 0 to 0 while current ratio and quick ratio both rise from 1 to 1. Motion pictures seems to be a rising star in 2018 because all of its ratio are good. Netflix slacked behind as its current ratio and quick ratio though seem good but both of them is less than the average mark (1 and 1 respectively). Cash ratio is nowhere near the average mark (0. 58 to 1) 2019 was not a good year for Netflix as we can see here that 2 of its ratio had dropped drastically. Current ratio and quick ratio drop from 1 to 0; which is quite a large amount. Cash ratio did make a raise; from 0 to 0 but didn’t make much of a change because it still below 1 and implied that the company didn’t have enough cash to cover its current liabilities. In 2019 the average industry financial ratio is not in good shape either. Although Netflix’s ratios are much worse than the recent years but compare to the average mark, it’s still a quite decent amount. (The average mark is 0; 0 and 0. respectively)

2. Solvency ratios...................................................................................................

Ratio 2019 2018 2017

Debt-to-assets 0 0 0.

Debt-to-capital 0 0 0.

Debt-to-equity 1 1 1.

1. The debt to assets ratios from 2017 - 2019 of Netflix are quite constant, being 0; 0; 0 respectively. These figures are actually quite a good sign because they’ve shown that company by then didn’t have much to worry about debt ; it had the capability to pay off its debt with its available assets and did not have much struggle meeting its obligations.
2. The debt to capital ratios from 2017 - 2019 do not vary much. Being 0; 0; 0 respectively and with an average of 0; Netflix was quite a safe bet during that time as having lower debt to capital ratio also means having lower risk of insolvency.
3. In the three years from 2017 to 2019, Netflix’s debt to equity ratios are all quite high and also do not vary much. In 2017, it’s 1. In 2018 it’s 1. and in 2019 it’s 1. It’s all quite close to 2 and this indicates that the company it’s quite risky. In 2018 we saw an increase in the debt to equity ratio but in dropped a little in 2019; which may indicate a good sign in the futur fact in the year of 2018, Netflix has the highest debt to ratio figure in 3 years. In 2017 and 2019 the average ratios are 1 and 1 - which in my opinion still indicates quite a safe bet while Netflix struggle to maintain its figure below 2.

3. Profitability ratios...............................................................................................

3. Profit margin Netflix had lower profit margin than median industry ratios in 2017. Its profit margin increased yearly and surpassed average industry ratios in 2019 which is a good signal for them. Lions Gate and AMC had higher ratios than either Netflix and Industry ratios.

Lions Gate 3% 6% -0%

AMC 2% 4% 2%

Industry ratios (Median)

-10% 8% 1%

Netflix had the highest operating margin compare with Lions Gate, AMC, and Industry ratio in 3 years. It means that the company is efficient in its operations and is good at turning sales into profits.

Netflix Lions Gate AMC Industry ratios

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Chart Title

2019 2018 2017

3. Basic Earning Power (BEP)

2019 2018 2017

Netflix 7% 6% 4%

Lions Gate 1% 2% -0%

AMC 0% 2% 1%

Netflix’s BEP increased steadily and was the highest one in those three companies. Netflix is more efficient at generating income from its assets. On the other hand, Lions Gate and AMC’s BEP have not been stable over time.

Netflix Lions Gate AMC -1%

0%

1%

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6%

7%

8%

Chart Title

2019 2018 2017

3. Return on Equity (ROE)

2019 2018 2017

Netflix 24% 23% 15%

Lions Gate -10% 14% 0%

AMC -12% 7% -23%

Industry ratios (Average)

-6% -92% -30%

Netflix had the highest ROE in three years and grew annually. It may provide that the company management is good at generating shareholder value because it knows how to reinvest its earnings wisely, so as to increase productivity and profits.

Netf

lix Lio ns G

ate AMC

Ind ust ry r atio

s (Me

dia n)

-40%

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Chart Title

2019 2018 2017

4. Acivity ratios

5. Fixed Assets Turnover (FAT)

2019 2018 2017

Netflix 6% 11% 12%

Lions Gate 5% 5% 3%

AMC 0% 1% 1%

Even though Netflix’s FAT decreased overtime, it was still higher than Lions Gate and AMC. A declining ratio may also suggest that the company is over- investing in its fixed assets.

0% Netflix Lions Gate AMC

2%

4%

6%

8%

10%

12%

14%

Chart Title

2019 2018 2017

4. Total Assets Turnover (TAT)

2019 2018 2017

Netflix 0% 0% 0%

Lions Gate 0% 0% 0%

AMC 0% 0% 0%

The ratio measures the efficiency of how well a company uses assets to produce sales. These numbers showed that Netflix operates more efficiently than both Lions Gate and AMC. This reduction may be caused by the over-investing in Fixed Assets as we can see in the previous part. However, it was having a greater TAT than its competitors.

0% Netflix Lions Gate AMC

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Chart Title

2019 2018 2017

5. Valuation ratios

5. P/E

2017 2018 2019

Netflix 188% 91% 78%

Lions Gate 33% 15% 10%