Principles of Finance
Netflix’s income statement showcases a company with rapidly growing revenues. In FY17, the company earned revenues of $11.7 billion, and this grew to $15.8 billion in 2018 and $20.1 billion in FY19. The company was only marginally profitable in 2016, but its profits have grown to nearly $1.9 billion in FY19. Again, this is strong growth, and would be viewed quite positively by investors. Indeed, the company’s earnings per share have grown from $1.25 to $4.13 over the past three years, a strongly positive trend.
In some cases, rapid growth comes on the back of steep increases in infrastructure costs, but Netflix has also seen a sharp increase in profits, and this is reflected on the company’s balance sheet. Netflix has seen its cash position more than double in the past couple of years, and its stockholder equity has doubled, as a result of the sharp increase in the company’s profits. While Netflix has taken on more debt in order to fuel this growth, its balance sheet is quite healthy. Long term debt was $6.5 billion at the end of 2017 and was $14.7 billion two years later. However, the long term debt-to-equity ratio changed from 1.8 at the end of 2017 to 1.94 at the end of 2019, which is not a very significant increase. Thus, most of the company’s growth has been fueled by its internal profitability, and the company is simply keeping its debt to equity ratio around the same level.
Overall, a stockholder would have to view the changes in Netflix’s financials positively. The company is growing rapidly, and this is reflected well on the income statement. While its debt is increasing, its equity is increasing almost as quickly. Combined with a steep increase in earnings per share, Netflix looks like a good company in which to hold stock, in particular if the price is good at the present time.
References
Netflix 2019 Annual Report: http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_NFLX_2019.pdf
Netflix 2018 Annual Report: https://s22.q4cdn.com/959853165/files/doc_financials/annual_reports/2018/Form-10K_Q418_Filed.pdf
