Financial Analysis - Netflix Inc - Essay Example

Financial Analysis: Netflix Inc. Student Name Institutional Affiliation Financial Analysis: Netflix Inc. 1. You have to 20 financial ratios for Netflix. In a second column, indicate whether you consider each ratio to be strength, a weakness, or a neutral factor for Netflix. (Most recent year for Netflix) Solution: Ratios Calculation (2011- Annual Report) Strengths, Weakness, Neutral 1 Current Ratio (1,830,857/1,225,055) = 1.5: 1     Neutral S,W,N Explanation -0.5 current ratio because its way above blockbuster which stands at 1.9: 1 Industry Average +1.1 current ratio since the industry average stands at 0.4 Change over time -0.3 current ratio given that the ratio stands at 1.3 in 2012 2 Quick Ratio (1,830,857-919,709)= 1.99:1 Weakness S,W,N Explanation + quick ratio since it is way above the blockbuster’s whose ratio is placed at 1.86 Industry Average +1.95 quick ratio against the industry average indicating that company is operating at a secured liquidity position Change over time -ratio meaning that the company is shifting its stability position in respect to the amount of assets possessed. 3 Debt-to-Total-Assets Ratio (400,000/3,069,196) = 0.13  Weakness S,W,N Explanation + Ratio as compared to Blockbuster’s ratio. This is attributed to the financial stability of the company in its day-to-day operations. Industry Average -ratio given that the industry average stands at 0.19 Change over time -0.01 ratio given that the ratio is placed at 0.12. 4 Debt-to-Equity Ratio (400,000/642,810) = 0.62   Weakness S,W,N Explanation -ratio in comparison to Blockbuster’s similar financial ratio. This is associated with better management of equity within the competitors operations. Industry Average -ratio in comparison to the industry average which is placed at 58.0 Change over time -0.08 ratio in comparison to 2012 financial year whose ratio is placed at 0.54 5 Long-term debt-to equity ratio (200,000/642,810) = 0.31 Weakness S,W,N Explanation -ratio in comparison to Blockbuster company. This means that the competitor is operating at fewer debt levels. Industry Average - Change over time -ratio given that the 2012value is placed at 30 % 6 Times-interest earned ratio (1,164,676/20,025) = 58.16X  Weakness S,W,N Explanation -ratio in comparison to Blockbuster given that the aforementioned company conducts greater sales volume in comparison to Netflix Industry Average + 8.16 ratio given that the industry average is placed at 50.0x Change over time -3.0 ratio value given that the proceeding year the company’s interest earned increased due to more loans borrowed. 7 Inventory turnover (3,204,577/ 919,709)=  3.48 Weakness S,W,N Explanation -ratio as compared to Blockbuster. This means that the competitors has devised efficient ways of selling films to the consumers Industry Average There is no available data provided for this purpose Change over time -1.1ratio is depicted in the preceding year. This might be due to less amount of sales being made 8 Fixed Assets Turnover (3,204,577/1238339)= 29.59 Neutral S,W,N Explanation - ratio is depicted in comparison to the competitor whose ratio stands at 29. This might be because the company might be adjusted in respect to asset maintenance programs Industry Average 0 ratio is depicted given that the industry average stands at 29.0 Change over time 0 changes in the value of ratio is depicted. The 2012 ratio is placed at 26.93 9 Total Assets Turnover (3,204,577/3,069,196) = 1.04   Neutral S,W,N Explanation 0-ratio change is depicted given that Blockbuster’s ratio is almost placed at a similar level of 1.02. This might mean that both the companies are using normal amount of assets to post sales Industry Average 0-ratio change. The industry average stands at 1.0. Change Overtime 0-ratio change is witnessed. The value stands at 1.03 in 2012. This means that the company utilizes normal amount of assets in order to affect the levels of sales 10 Average Collection Period (57,33000/40,766)= 111.41days Weakness S,W,N Explanation -ratio is depicted as compared to blockbuster whose average collection period stands at 50 days. The company might be operating on fewer sales Industry Average No data is available for analysis Change Overtime + ratio is depicted given that the collection period for 2012 has been reduced to 76.38. This improvement might be attributed to strong sales volume. 11 Gross Profit Margin (3,204,577-2,039,901/ 3,204,577)=  36 % Strength S,W,N Explanation + ratio in comparison to Blockbuster. This means that the company is incurring fewer costs in order to posts profits. Industry Average +8.75 % increase is depicted in comparison to the industry ratio of 27.25 Change Overtime -8.75 % decrease is depicted given that in 2012 the ratio stands at 27.25%. This might be caused by increase in cost of goods sold. 12 Operating Profit Margin (376,068 /3,204,577)=12% Strength S,W,N Explanation +3 % increase is depicted when the ratio is compared to Blockbusters. This might mean that the company sells its film at higher prices hence fetching more profits. Industry Average +11.4 % increase of the company’s ratio in comparison to the expected industrial value that is placed at 2.64 % Change Overtime -11.7 % decrease is evident in the preceding year. This might be attributed to the dropping of prices of films hence more sales required in order to post immense profits. 13 Net profit Margin (226,126 /376,068) =0.6 Weakness S,W,N Explanation -5 % decrease in comparison to the ratio of its competitor. This might be attributed to less volume of sales as a result of lost customers. Industry Average No available data for analysis Change Overtime -0.12 % decrease in the preceding year is depicted. This is as a result of price falls and lost customer 14 Return on Total Assets (226,126/3,069,196)=  0.07 Weakness S,W,N Explanation -0.78 % ratio value is noted in comparison to Blockbuster’s ratio. This might be attributed to less assets being used in order to posts profits by the competitor Industry Average -0.78 ratio value is depicted. This is because the normal value stands at 0.89 Change Overtime +0.42 % increase is depicted in the preceding year (2012). This might be attributed to the company adopting newer strategies of utilizing few assets in order to make substantial profits. 15 ROE (226,126/642,810)= 35%  Strength S,W,N Explanation +2.5 % increase of the ratio in comparison to Blockbusters. This means that the company has vast equity-base that it can use to make profits Industry Average +30.63 % increase in comparison to the 2.64 % industrial ratio. Change Overtime -30.63 % decrease is noted in the year 2012. This might be caused by the loosening of the level of equity-base needed in affecting income. 16 Earnings per share (226,126/160,000) = 1.41 Strength S,W,N Explanation +0.3 % increase in comparison to Blockbusters. This might be due to increased levels of profits. Industry Average No available data for analysis Change Overtime -0.2% decrease is noted in the year 2012. This is because the company might have increased its prices thus attracting few sales which are translated to shareholders wealth. 17 Price-earnings ratio (221.88/ 1.41) = 157.36   Strength S,W,N Explanation +20 % increase is noted in comparing the ratio to that f Blockbusters. This is because Netflix has attracted more investors Industry Average +57.36 % increase is noted in the ratio as compared to the industry ratio which is placed at 100X Change Overtime +2.1% increase is noted in the year 2012. This might be attributed to the ability of the company to attract more investors. 18 Earnings per share (226,126/160,000) = 1.41 S,W,N Explanation +0.3 % increase in comparison to Blockbusters. This might be due to increased levels of profits. Industry Average No available data for analysis Change Overtime -0.2% decrease is noted in the year 2012. This is because the company might have increased its prices thus attracting few sales which are translated to shareholders wealth. 19 Dividends per share 0 % Weakness S,W,N Explanation -1.8 % decrease is noted. This is because Blockbusters issued a $1.8 dividend pay-out. Industry Average No data available for comparison Change Overtime O-dividends were paid. This might mean that the company is practicing intense retaining earnings strategies in order to expands its services 20 Accounts Receivable Turnover (148,796/57,330)= 2.6   Weakness S,W,N Explanation -10 days is noted in comparison to Blockbusters ratio. This might be because the company is not selling goods on credit. Industry Average No data available for analysis Change Overtime No data available for analysis 2. You need to write down 10 Strengths and 10 weaknesses for Netflix Solution: I) 10 Strengths i) Market power. It is fair to indicate that Netflix has secured a marketing niche that amounts to 75% of the online DD rental activities. Accordingly, it remains to be one of the most sought-after household names in respect to DVD rentals. ii) Economies of Scale; the company’s online systems and flexible forms of infrastructure promote low costs of operations while increasing customer base. The company’s costs of operations are 25 % less than that of its immediate competitors like Blockbusters. iii) Value in Customer Services; the company offers mainstream features to its customers. This, in turn, increases their level of customer base given that DVD’s are rented on ratings iv) Large DVD Collection; the company boasts of over 100,000 titles and 72 million discs which are mostly new releases and television shows. It has wider home-video selection functionality. v) Effective Pricing Strategy; the company practices price discrimination strategy that allows about 75 % increases in revenues. Their subscription fee is reduced immensely to a multi-tiered level. vi) Effective Management team; the company boasts of experts who form the management structure. Given their level of expertise they provide distinct services to customers. vii) Efficient Marketing Strategies; the company advertises through most of the media platforms. Their pricing and packaging criteria are the rationale behind the 75 % market base. viii) The company conducts extensive R&D activities in order to come up with DVD’s that are likeable. At least 25 % of the total revenue of the company is directed towards positive research in the film industry. ix) The effective management information system of the company plays a key role in conducting online transactions without failure. These systems are also used in conducting internal checks so that fewer DVD, s is misplaced. x) The accounting and finance department of the company works on an efficient real-time bound. This means that the clients are able to receive refunds in case of order-placement misunderstanding. 10 Weaknesses: i) The company suffers churned subscribers acquisition costs; this is attributed to the fact that the company is subscription based meaning that its possibility to grow depends on its ability to lower churn rates. This phenomenon leads to lack of switching costs. ii) The company has reached its redundancy stage so that global diversification has been met with immense challenges. The company only provides services within the United States area with little possibilities of expanding to other emerging markets. iii) The internal operations of the company are mainly dependent on the power of studio. This means that the entire operations of the company will be paralyzed in case studios chose tom prolong the 4-6 week gap between release of both new DVD,s and VOD. iv) Possible system failure; might lead to loss of rental database hence loss of some of the CD’s. v) In-efficient staffing personnel; might cause immense delays of the rental DVD’s hence leading to subsequent loss of customers. vi) The unpredictability of the Video Rental industry also poses a weakness in the day-to-day operations of the company. This weakness is attributed to the inability to cope-up with changing consumer preferences. vii) The production rate of the renting service within the company is faced with lack of sufficient personnel. This might lead to immense accumulation of orders hence losing customers to competitors. viii) The company is unable to maintain a 100 % database of the rental DVD, s. this causes loss of the CD, s thereby translating to loss of revenue. ix) The fact that the company has dwelled so much on online transactions poses a challenge of trust by the potential customers. Technological advancements are not fairly placed at a global perspective. x) Lack of enough financial resources has also affected the production capacity of the company. The company operates under a tight budget that is difficult to maintain. 3. You have to 4 SO Strategies, 4 WO Strategies, 4 ST Strategies and 4 WT Strategies (You don’t have to whole table, just write 4 SO Strategies, 4 WO Strategies, 4 ST Strategies and 4 WT Strategies) SO Strategies: i) Develop rental features in major international cities outside the already established US market. Development should reach such cities as Hong Kong and China given that the population has, in recent years, increased film culture. ii) The Company should generate more products such as manual stores in order to aid with the distribution of DVD, s within the untapped markets. iii) The DVD, s and VOD releases are experiencing immense levels of profits. Thus, the profits could be used, by the company, to more potential customers. iv) The company should develop plans to rent the DVD, s release to more places than just the US market. WO Strategies: i) The company should engage in extensive R&D activities in order to establish the exact tastes and needs of customers. ii) Release old classic films on DVD, s as sections of new editions. iii) Intensify online presence given that the globe is going to be connected. This will increase the number of customers of the business. iv) The company should design more customized-based films in order to provide quality services to the customers. This is in respect to the ever-changing customer’s experience. ST Strategies: i) The company should embark on offering discounts to more DVD renters ii) It should improve their working environments in order to attract sufficient levels of employees. iii) The company should develop a movie rental website that will offer real-time services for an extra $ 3 in order to raise sufficient revenues. iv) The company should retrench older workers and replace them with newer ones whose level of technological skills is high. In this manner, the company will save a lot on accumulated orders. WT Strategies i) A rental store can be built in the states of Alaska and Hawaii in order to provide quality levels of service to these customers. In this manner, the rental DVD, s will be more accessible. ii) It is fair that the company develops a fresh website for young adults to download movies. This is because a profound 80 % of US internet users download movies to watch. iii) Affordable pricing models should be encouraged as opposed to high pricing strategies of the company. iv) The company can develop parks where movies can be watched firsthand and in that way provide additional revenue needed in growth of the business activities. 4. You need to fill in the following table for Netflix. This table is for the Boston Consulting Group (BCG) Matrix. You don’t have to make BCG Matrix. Please just fill in the table. Example A BCG Matrix for Netflix (In millions) Division Revenue Percent Revenues Profits Percent Profits Relative Market Share Industry Growth Rate (%) 1 Media Networks(VOD, AD-Supported and Subscriptions) $ 114,2059.65 45 $791,979.68 68 0.145 18.76 2 Parks & Resorts $897,281.56 28 $197,994.92 17 0.01 3.9 3 Studio Entertainment $ 576,823.86 18 $104,820.84 9 1 10 4 Consumer Products $224,320.39 7 $ 104,820.84 9 1 -8.82 5 Interactive Media $ 64,091.54 2 - $34,940.28 -3 0.2 -14 Total $3,204,577 100 $1,164,676 100 References Block Buster expands Netflix-like service. (2004, May 26).CNN Money. Accessed from http://money.cnn.com David, F. R. (2013). Strategic Management Concepts and Cases, A competitive Advantage Approach; Fourteenth Edition. New Jersey: Pearson Education, Inc Morningstar. (N.d).Netflix Financials. Accessed from http://financials.morningstar.com/ratios/r.html?t=NFLX Netflix, Inc. 2011annualreports.Accessed from http://ir.netflix.com/secfiling.cfm?FilingID=1193125-12-53009 Netflix, Inc (NFLX: NASDAQGS).Industry Averages. Accessed from http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=NFLX Read More