Netflix Financial Ratio
In this section of the report, we will be discussing three financial ratios to determine Netflix’s liquidity, debt management, and profitability. These three areas are important because if there is a sudden shift in consumers needs, these areas would be affected the most.
Liquidity (Current Ratio): The current ratio is calculated using the current assets by current liabilities. This ratio shows how fast Netflix is able to pay off their short-term liabilities using their current assets. Netflix’s biggest competitor is Amazon and in comparison, Netflix has a better current ratio than Amazon (Yahoo Finance, 2015). In 2014, Netflix’s (NFLX) had a current ratio of: $3,940,469 / $2,663,154 = $1.48 and Amazon’s (AMZN) current ratio was $31,327,000 / $28,089,000 = $1.12. You can conclude that every dollar of debt that Netflix owes they have $1.48 to back it up for repayment. The lack of inventory with Netflix, along with the low accounts payable due is the reason why Netflix has a better current ratio …show more content…
over Amazon. Creditors see this as an advantage, and will more likely invest in Netflix because they appear to manage their liabilities better.
Debt Management/Financial Leverage (Debt to Equity Ratio): The formula to obtain debt to equity is: Total Liabilities/Shareholder’s Equity.
This shows what proportion of the equity and debt the company is using to finance their assets. The general rule is the lower the number is the better off their company is, because they have lower debt in relation to their equity. In 2014, Netflix had a debt to equity ratio of $2,666,154 / $1,857,708 = 1.43 and Amazon had a debt to equity ratio of $28,089,000 / $10,741,000 = 2.62 (Yahoo Finance, 2015). The calculation shows us that Netflix had a lower risk of debt than Amazon, with a ratio of 1.43. Amazon risks having a higher debt to equity because in addition to streaming media, they need property, plants, and warehouses to store their inventory.
Profitability (Profit Margin): Profit margin measures how much money out of one dollar a company can keep for their earnings. The profit margin formula is: Net
Income/Revenues.
In 2014, Netflix had a profit margin of $266,799 / $5,504,656 = 4.8%. This means for every dollar of revenue earned they have net income of four cents. This is understandable because a lot of money is used to buy media and contracts for studios. Amazon, on the other hand, is in the negative. $88,988,000 / ($241,000)= -3.6%. Forbes analyzes that Amazon’s low pricing strategy, fulfillment and warehousing costs are factors of Amazon’s low profit margin (Forbes, 2014).
Liquidity (Current Ratio): The current ratio is calculated using the current assets by current liabilities. This ratio shows how fast Netflix is able to pay off their short-term liabilities using their current assets. Netflix’s biggest competitor is Amazon and in comparison, Netflix has a better current ratio than Amazon (Yahoo Finance, 2015). In 2014, Netflix’s (NFLX) had a current ratio of: $3,940,469 / $2,663,154 = $1.48 and Amazon’s (AMZN) current ratio was $31,327,000 / $28,089,000 = $1.12. You can conclude that every dollar of debt that Netflix owes they have $1.48 to back it up for repayment. The lack of inventory with Netflix, along with the low accounts payable due is the reason why Netflix has a better current ratio …show more content…
over Amazon. Creditors see this as an advantage, and will more likely invest in Netflix because they appear to manage their liabilities better.
Debt Management/Financial Leverage (Debt to Equity Ratio): The formula to obtain debt to equity is: Total Liabilities/Shareholder’s Equity.
This shows what proportion of the equity and debt the company is using to finance their assets. The general rule is the lower the number is the better off their company is, because they have lower debt in relation to their equity. In 2014, Netflix had a debt to equity ratio of $2,666,154 / $1,857,708 = 1.43 and Amazon had a debt to equity ratio of $28,089,000 / $10,741,000 = 2.62 (Yahoo Finance, 2015). The calculation shows us that Netflix had a lower risk of debt than Amazon, with a ratio of 1.43. Amazon risks having a higher debt to equity because in addition to streaming media, they need property, plants, and warehouses to store their inventory.
Profitability (Profit Margin): Profit margin measures how much money out of one dollar a company can keep for their earnings. The profit margin formula is: Net
Income/Revenues.
In 2014, Netflix had a profit margin of $266,799 / $5,504,656 = 4.8%. This means for every dollar of revenue earned they have net income of four cents. This is understandable because a lot of money is used to buy media and contracts for studios. Amazon, on the other hand, is in the negative. $88,988,000 / ($241,000)= -3.6%. Forbes analyzes that Amazon’s low pricing strategy, fulfillment and warehousing costs are factors of Amazon’s low profit margin (Forbes, 2014).