Analysis of Netflix
Accounting 411
Due: Oct. 12, 2010
Assignment 5-A: DuPont Model Analysis for Netflix
Required:
a. For each ratio in the Basic DuPont Model and the Advanced DuPont Model, provide an interpretation, i.e., are they favorable or unfavorable, is the 5-year trend positive or negative?
Basic DuPont Model
Net Profit Margin: Favorable. The trend is positive. Net profit margin has increased four out of the five years. This means that the company is making more income per each dollar of sales, which is a good trend.
Total Asset Turnover: Favorable. Total asset turnover has also increased the majority of the time. It slightly decreased one year and increased in the remaining three. Firms would like to have a high margin and a high turnover, so it is a mostly positive trend that turnover is increasing as well as the net profit margin.
Total Leverage: Unfavorable. The trend is positive because total leverage has increased most years. The higher number, the more debt a company has which means that the company has to pay a higher interest expense. Therefore, the net income will be lower which will in turn lower the net profit margin, affecting the ROA. Stockholders want ROE to increase, but not strictly due to the leverage increase. From 2008 to 2009 the total leverage of Netflix increased 1.5 times from 1.569 to .424.
The 5-year trend is positive because ROE has increased each year. It was .153 in 2006 and reached .424 in 2009. It is favorable because it is what investors like to see, but should be looked at closely. The leverage increased greatly over the past year, which is something to keep a close look at.
Advanced DuPont Model
Net Operating Margin: Favorable. The 5 year trend is positive. NOM decreased from the first year to the second, but has increased since then.
Net Operating Asset Turnover: Favorable. This trend is also positive for the most part. Out of the four years of data, the ratio decreased in one
Due: Oct. 12, 2010
Assignment 5-A: DuPont Model Analysis for Netflix
Required:
a. For each ratio in the Basic DuPont Model and the Advanced DuPont Model, provide an interpretation, i.e., are they favorable or unfavorable, is the 5-year trend positive or negative?
Basic DuPont Model
Net Profit Margin: Favorable. The trend is positive. Net profit margin has increased four out of the five years. This means that the company is making more income per each dollar of sales, which is a good trend.
Total Asset Turnover: Favorable. Total asset turnover has also increased the majority of the time. It slightly decreased one year and increased in the remaining three. Firms would like to have a high margin and a high turnover, so it is a mostly positive trend that turnover is increasing as well as the net profit margin.
Total Leverage: Unfavorable. The trend is positive because total leverage has increased most years. The higher number, the more debt a company has which means that the company has to pay a higher interest expense. Therefore, the net income will be lower which will in turn lower the net profit margin, affecting the ROA. Stockholders want ROE to increase, but not strictly due to the leverage increase. From 2008 to 2009 the total leverage of Netflix increased 1.5 times from 1.569 to .424.
The 5-year trend is positive because ROE has increased each year. It was .153 in 2006 and reached .424 in 2009. It is favorable because it is what investors like to see, but should be looked at closely. The leverage increased greatly over the past year, which is something to keep a close look at.
Advanced DuPont Model
Net Operating Margin: Favorable. The 5 year trend is positive. NOM decreased from the first year to the second, but has increased since then.
Net Operating Asset Turnover: Favorable. This trend is also positive for the most part. Out of the four years of data, the ratio decreased in one