This document analyzes the financial management of Netflix. It discusses Netflix's business model, financial performance from 2016-2017, and key financial metrics like its weighted average cost of capital (WACC) of 7.24% and return on investment capital of 12.02%. The document also compares Netflix to its main competitors, Amazon and eBay, finding that Netflix has a higher debt-to-capital ratio but also higher earnings and growth potential. Overall, the analysis finds that Netflix has shown consistent growth and increasing profitability, making it a viable investment opportunity.

1. Netflix Financial Management Analysis
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2. Netflix Financial Management Analysis
Introduction
Financial management is a field of business that is involved in planning, organizing,
directing, and controlling of financial activities including procurement and utilization of funds in
a given firm (Brigham et.al, 2013). Financial management entails the application of the
Directorate principles on the financial resources of the given firm. Financial management targets
are ensuring adequate and regular supply of financial resources to a predetermined concern by
focusing on optimum funds utilization. Good financial management ensures the safety of an
investment. In this research financial management analysis, the company of interest shall be
Netflix.
Netflix is an American-based entertainment company. It was founded in the year 1997 by
Reed Hastings and Marc Randolph (Chopra et.al, 2017). The company specialized in streaming
media as well as selling of online DVDs. The DVDs sales also included rentals by business mail
(Chopra et.al, 2017). In 2013, the company diversified into film and television production that is
still coupled with online distribution. The company has its headquarters in California. The
company expanded internationally and now operates in more than 190 countries (Chopra et.al,
2017) except for mainland China, North Korea, Crimea, and Syria. Its key products are currently
streaming media and video-on-demand. The company also offers services including film
production and distribution as well as television production (Chopra et.al, 2017).
Firm Value
As at December 2016, Netflix recorded a revenue of $8.83 billion with its operating
income at $380 million (Ani et.al, 2016). Its net income for the period was $187 million (Ani

3. et.al, 2016). The company’s total assets were evaluated at $13.6 billion, and its total equity was
$2.7 billion as at December 2016(). By the year 2015, the company had employed about 3500
employees in its three divisions. These divisions included domestic streaming, international
streaming, and domestic DVD. The divisions were distributed in their subsidiaries which include
Netflix International B.V, Netflix Streaming Services, and Netflix Studios, LLC(). Currently,
Netflix commands slightly above 98 million subscribers worldwide with a 50 million
subscription in the US (Ani et.al, 2016).
As of March 2017, the company was operating at a volume of 9186211(). Its revenues for
the period stood at $2.64 billion with a record + 34.68% revenue growth and +544.38% net
income growth (Ani et.al, 2016). The debt as at March 2017 was $3.4 billion accounting for
53.1% of the company’s value. The value of the equity at the same period was recorded as $3.0
billion which accounted for 46.9% of Netflix value (Venkatesan et.al, 2017). The company’s
debt-to-equity ratio was 1.26 as of December 2016. Its debt-to-capital for the same period was
0.56 (Venkatesan et.al, 2017).
WACC and CAPM
As of today, according to (Venkatesan et.al, 2017), Netflix’s Inc Weighted Average Cost
of Capital (WACC) is 7.24%. The company’s Return on Investment Capital (ROI) is currently
12.02% as calculated based on TTM income statement data. The high WACC concluded that
Netflix generates or rather obtains higher returns on investment than it costs the company to
bring in the needed capital for the kind of required investment. In light to this, the company can
be said to be earning excess returns. For this matter, if the WACC increase, more returns shall
have been made on new investments in the future and hence the growth value of the company
increases.

4. The WACC is calculated by using the Eqn. 1 below, where E is the market value of
equity or rather the market capitalization and D is the total book value of debt.
WACC = E/ (E+D) * Cost of Equity + D/ (E+D) * Cost of Debt * (1-Tax Rate)
Netflix’s market capitalization, also known as a market cap, is currently $63.71 billion.
As of March 2017, Netflix had a total book value of debt of $2.87 billion (Ani et.al, 2016). The
weight of equity was then calculated as 0.9569 while the weight of debt was found to be 0.0431.
The cost of equity is calculated by using Capital Asset Pricing Model (CAPM) to find the rate of
return. The formula used to calculate the cost of equity is (risk-free rate of return +beta of asset
* (expected the return of the market – risk-free rate of return)). Netflix’s risk-free rate is
currently 2.28% while the beta sensitivity of the expected excess asset returns to the expected
excess market returns is 0.85 (Venkatesan et.al, 2017). The required market premium is 6%, and
hence the cost of equity is calculated as 7.38%. The cost of debt is obtained as 5.23% while the
average tax rate is 20.95%. Using the calculated values, the WACC was calculated as 7.24%.
Logically, it costs money to raise capital. A firm that attains higher ROI than it costs the
company to raise the required capital is said to be earning excess returns. For this matter, if the
company projects a continued generation of positive excess returns on new investments, its value
increases as growth increases.
The CAPM indicates the required or rather the expected rate of return on risky assets.
Netflix’s common stock is considered as an immediate risk asset. The rates of return are
estimated through a systematic risk. As of December 2016, the rate of return for the company
was estimated at 5.81% (Venkatesan et.al, 2017). The expected rate of return on Netflix’s
common stock is currently evaluated at 15.88%.

5. Comparison with Main Competitors
The two largest competitors for Netflix are Amazon Inc. and eBay Inc. These two
companies also trade similar products through their online programs. They distribute and to some
extend stream media content. The competitors, however, do not have film or television
production capacity. The diversification feature makes Netflix a producer as well as a distributor,
giving the company a greater market share of the products and services. The competitors,
however, enjoy a lower debt-to-capital ratio. Netflix has a debt-to-capital ratio of 0.56, Amazon
has a ratio of 0.51, and eBay has a debt-to-capital ratio of 0.46.
Netflix earnings ratio of 342.24 is higher than its peer’s average at around 162.97. Their
stocks are then more expensive and are prepared for better growth. Their earnings growth is,
however, lower than that of its competitors. It means that Netflix sells its products and services at
a discount when considering long-term earnings growth. The company’s price per book ratio for
Netflix is higher than its peers. The ratio entails their differentiation strategy and looks forward
to wooing investors into their fast growing market share.
Conclusion
Netflix has shown a constant growth since their incorporation. They have also seen an
increased profitability throughout their business. The gross margin, for instance, is at +31.72
while its return on assets and equity is 1.57 and 7.61 respectively. The return on total capital and
invested capital is 3.49. The positive values of the profitability ratios depict a constant as well as
an expected growth. For this matter, the company proves to be a potential or rather viable room
for investors. The high ROI value encourages investors and offers a high security on the
investors’ investment.

6. References
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & practice. Cengage
Learning.
Chopra, S., Chopra, S., Veeraiyan, M., & Veeraiyan, M. (2017). Movie Rental Business:
Blockbuster, Netflix, and Redbox. Kellogg School of Management Cases, 1-21.
Ani, F. G., Günther, D., Wang, B., & Bondarenko, I. (2016). A Strategic Analysis of Netflix Inc.
Venkatesan, R., Venkatesan, R., Shively, D., Shively, D., Venkatesan, R., & Venkatesan, R.
(2017). Netflix, Inc.: The Customer Strikes Back. Darden Business Publishing Cases, 1-7.

7. References
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & practice. Cengage
Learning.
Chopra, S., Chopra, S., Veeraiyan, M., & Veeraiyan, M. (2017). Movie Rental Business:
Blockbuster, Netflix, and Redbox. Kellogg School of Management Cases, 1-21.
Ani, F. G., Günther, D., Wang, B., & Bondarenko, I. (2016). A Strategic Analysis of Netflix Inc.
Venkatesan, R., Venkatesan, R., Shively, D., Shively, D., Venkatesan, R., & Venkatesan, R.
(2017). Netflix, Inc.: The Customer Strikes Back. Darden Business Publishing Cases, 1-7.