ASSIGNMENT REPORT of corporate finance 1 FINANCIAL STATEMENTS ANALYSIS OF NETFIX, INC

NATIONAL ECONOMICS UNIVERSITYASSIGNMENT REPORT of Corporate Finance 1 FINANCIAL STATEMENTS ANALYSIS OF NETFIX, INC Hanoi, Mar 2020 TIEU LUAN MOI download : skknchat@gmail.com... Lions Ga

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NATIONAL ECONOMICS UNIVERSITY

ASSIGNMENT REPORT

of Corporate Finance 1

FINANCIAL STATEMENTS ANALYSIS OF NETFIX, INC

Hanoi, Mar 2020

TIEU LUAN MOI download : skknchat@gmail.com

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Table of Contents

I – Introduction 2

1 – Purpose of the report 2

2 – Overview 2

II – Analysis 2

A Balance sheet 2

1 Assets 2

2 Liabilities & Shareholders' Equity 2

B Income Statement 2

C Cash Flow 2

D Financial Ratios 2

1 Liquidity ratios 2

2 Solvency ratios 2

3 Profitability ratios 2

4 Acivity ratios 2

5 Valuation ratios 2

E The DuPont system 2

III – Conclusion 2

IV – Reference 2

1 Netflix, Inc 2

2 AMC Entertainment Holdings, Inc 2

3 Lions Gate Entertainment Corp 2

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I – Introduction

1 – Purpose of the report

This report discusses and analyses Netflix’s financial performance over thepast 3 years (2017-2019), with the use of financial ratios The reason for choosing

is that Netflix is well known to many as a major streaming platform and thecompany that changed traditional DVD players as the main source for movies and

TV shows into the more equipped and reliable streaming services Finally, fromthis 3-year period performance, we can figure the points in which Netflix hasexcelled and the point in which they need some improvements

2 – Overview

a Entertainment Industry – Comunication Service Sector

Throughout the beginning of the 21st century, as our world was experiencing astrong evolution in technology, new consumer trends were starting to expand in theindustry Coming from an era were services in the television sector were verybroad and limited, the latest implementation of online streaming services, has sincepermitted customers to benefit from a wide range of available commodities As thetelevision industry faces new innovations, industry incumbents encounter newchallenges, and already established competitors are displaced In consequence, theonline video streaming service is considered a disruptive innovation to theconventional TV system

b Netflix, Inc (NFLX)

People Reed Hastings CEO, founder), Ted Sarandos

(co-CEO, chief content officer), Greg Peters (COO, CPO)

Company type Public (NASDAQ: NFLX)

Netflix was originally created as an online DVD rental service, for then

successfully establishing itself in the market for over-the-top (OTT) services Astreaming service that provides movies and TV shows just with a touch of a button, operates today as the biggest streaming platform in the world with over

204 million paid memberships in over 190 countries

Netflix saw an opportunity in the 1990s of a change in the way people watchmovies and TV shows, Netflix realized that the people don’t want to go to thestore, look for a DVD player, and purchase it They knew that the people

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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

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

AMC Entertainment Holdings, Inc

Founded in 1920 and headquartered in Leawood, Kansas, for market-sharecontext - AMC is not only America’s largest theater chain by locations in the USbut the largest in the world The company owns, operates, or has interests intheatres As of March 12, 2021, it operated approximately 1000 theatres and 10,700screens 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 MovieTheaters In short, Netflix would like to premiere a movie in theaters and on itsstreaming platform simultaneously, known as a “day-and-date” release That wouldincrease Netflix revenues while providing flexibility for consumers to see whatthey want, where they want, at a price they want

Theaters have resisted because they feel, rightly so, that a concurrent theaterand streaming launch will cut into their business As a safeguard, large theaterchains (including AMC) demand a 90-day window for a film to be shown intheaters before it is available in the home They enforce this with boycotts

Research studies suggest that between 13% to 28% of people prefer seeing afilm the first time in theaters instead of streaming If we use 15% on theconservative end of this range, and apply it to 576 million people who streamedthese 5 films, it leaves us with an estimated 86.4 million people who might havepreferred to watch these movies in theaters At an average ticket price of about

$9.16 in 2019, that’s a box office of $791.4 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 productionand distribution, television programming and syndication, home entertainment,interactive ventures and games, and location-based entertainment operations inCanada, the United States, and internationally Lionsgate has large output and

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many subsidiaries It’s been known to have distributed some big titles like TheHunger Games, Saw, Kick-Ass, The Expendables, Ender’s Game, and John Wick.

With none of the Lionsgate catalog streaming on Netflix right now (at least

in the US), It was a big deal at the time leading to Netflix putting out a blog postexplaining why it was happening, said that the movies were widely availableelsewhere beyond Netflix (when they were streaming on Netflix) and that’s aproblem because Netflix tends to like exclusivity whether that’s with its Originals

or third-party contracts

Combining Starz, one of the leading premium global streaming platforms,with its motion picture and television studio operation, launched its independentdirect to consumer over-the-top (OTT) app Lionsgate Play in India which takes onNetflix

II – Analysis

A Balance sheet

1 Assets

There was overall an increase in total assets from $25,974,400 in 2018 to

$33,975,712 This significant increase shows the growth of assets within thecompany which will aid in future economic increases

Total Assets

33,976 35,000.00

25,000.00

19,013 20,000.00

13,676 15,000.00

8,409

8,968 10,000.00

5,000.00

0.00

Netflix, Inc AMC Lions Gate

The total current assets decreased significantly from 2018 to 2019 This isdue to the reclassification of DVD content assets from current assets to non-currentassets This explains the decrease in current assets in 2019

Look at these figure, we can say that Long-term asset has the biggest portion

in total assets (about 81.8% in 2019) While, Cash on Hand was kept

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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 foremployees of the company

Total current assets Long-tem assets

Cash: Netflix ended 2017 with approximately 2.8 million in cash Over thenext 2 years, the company ballooned its cash position to approximately $5 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 cashmanagement 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, AccountsReceivable or inventory items

Property plant and equipment: Netflix has steadily increased its propertyplant 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 tosupport its growth needs From this assessment, investors should expect this lineitem to maintain its growth rate until revenue levels off

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Chart Title

8,000.00

7445.2 7,000.00

Netflix,Inc AMC Lions Gate

Netflix continues to have high long-term debt that is relatively consistent

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Total stockholder equity increased from $5,238,765 in 2018 to $7,582,157 in 2019.

An increase in stockholder equity signifies an increase in assets

(USD

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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 wasable to produce their service more efficiently in 2019 which is good for thecompany financially

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COGS (as apercentage of Sales)

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

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Net Income (USD millions)1,867.00

-487.2

Netflix, Inc AMC Lions Gate

An increase in net income demonstrates an increase in profitability as the

sales were greater than all expenses for that year

Cash From Financing Activities

Cash Flow from Financing activities – Netflix generates in Cash Flow from

financing by issueing its stock and debt

Cash Flow from Investing Activities – Netflix Cash Flow from Investing

activities was at -$387,06 million in 2019 as compared to $34,33 million in 2017

This was primarily due to increasing capital expenditure in the core business

Cash flow from Operating activities – Netflix Cash Flow from Operations is

weak due to continued losses over the year Netfix CFO was -$2887.32 million in

2019 as compared to -$1785.95 million in 2015

=> From 2017 to 2018 there has been a drop in net change in cash but it has

increased again in the period of 2018 - 2019 The ending cash balance has made

big progress as it continued to increase every year by around 32%

D Financial Ratios

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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 1.4 which means overall they

were able to satisfy the company’s current bills In comparison with the average industry’s financial ratio in U.S, Netflix was quite better off in 2017 because all

of its ratio is higher than average (the average ratio is 0.83; 1.06; 0.42

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 0.52 to 0.58 while current ratio and quick ratio both rise from 1.4 to 1.49

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 (1.53 and 1.91 respectively) Cash ratio

is nowhere near the average mark (0 58 to 1.03)

2019 was not a good year for Netflix as we can see here that 2 of its ratio haddropped drastically Current ratio and quick ratio drop from 1.49 to 0.9; which isquite a large amount Cash ratio did make a raise; from 0.58 to 0.73 but didn’tmake much of a change because it still below 1 and implied that the companydidn’t have enough cash to cover its current liabilities

In 2019 the average industry financial ratio is not in good shape either AlthoughNetflix’s ratios are much worse than the recent years but compare to the averagemark, it’s still a quite decent amount (The average mark is 0.56; 0.5 and 0.34respectively)

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0.3418; 0.3989; 0.4344 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

0.6447; 0.6642; 0.6606 respectively and with an average of 0.6565; Netflix

was quite a safe bet during that time as having lower debt to capital ratio also

means having lower risk of insolvency

quite high and also do not vary much In 2017, it’s 1.8145 In 2018 it’s 1.9776 and in

2019 it’s 1.9466 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.In fact in the year of 2018, Netflix

has the highest debt to ratio figure in

opinion still indicates quite a safe bet while Netflix struggle to maintain its figure

below 2.0

3.1 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

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Lions Gate 3.52% 6.02% -0.51%

(Median)

Netflix had the highest operating margin compare with Lions Gate, AMC,

and is good at turning sales into profits

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4.2 Total Assets Turnover (TAT)

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AMC 14.10% 12.42% 7.24%

It can be seen as the P/E ratios of both 3 companies are decreasing over time Indetail, among 3 companies, Netflix has the highest P/E ratios percentage, whileLions Gate decreases the PE ratios fastest after 3 years (-220.8%) Decreasing inNetflix was caused by the dropping of the price per share and a slight increasing inEPS Lower or decreasing EPS gives poor indication about the health of thecompany and gives lower return to the shareholders It will make the investors nolonger interest in investing the company in the long-run

Difference from P/E ratios, P/CF ratios table show an increasing in

financial data of both 3 companies although there’s a drop in 2019 of Lions Gate

and AMC Netflix P/CF ratios keep growing during 2017- 2019 (186.24% ->

323.57%), which reveal its advance ability to generate additional revenues The

same happens to Lions Gate and AMC, but in 2019, these ratios declined (Lions

Gate: 12.28% -> 6.701%) A high P/CF ratio indicated that the firm is trading at a

high price but is not generating enough cash flows to support the multiple This

will somehow explain the decreasing in P/E When a firm is overvalued, analysts

and other economic experts expect the price to drop eventually

E The DuPont system

Netflix is the only company among these three that offer a positive sign as its

ratios raise regularly (15.61% -> 24.62%) Contrary to Netflix, Lions Gate andAMC seem to become less efficient at creating profits and increasing

Tiêu đề	Financial Statements Analysis of Netfix, Inc
Trường học	National Economics University
Chuyên ngành	Corporate Finance
Thể loại	assignment report
Năm xuất bản	2020
Thành phố	Hanoi

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