1.

Netflix cash flow problems

Based on the financial statement of Netflix since 2017, the major cash flow problem are as
below:

A. Cash Flow from Operating Activities: Profit from operation should be compared to
the cash generated from operation figure to show quality of the income. Quality of
income (cash flow from operating activities/net income) of Netflix shows a negative,
less than 1 ratio of -3.20(2017), -2.21(2018) & -1.10(2019 1st quarter) which mean:
 Business is not able to turn its profit into cash leading to short term liquidity
problem.
 Even though Netflix has been maintaining a current ratio of 1 or more than 1
over the period. The current ratio of 2019 1st quarter has fallen down to 0.61.
B. Cash flow from Investing Activities show that purchase of assets which is major
security against loan has only increased to by 30% in 2018( as per balance sheet)
and there are no short term investment made since2017
C. Cash flow from Financing Activities: Netflix has to rely on long term debt which
seems to be the case right now as long term debit has increased by 59% but issuing
of stock by 24% since 2017.
D. Netflix negative cash flow has been increased by 50% in 2018.

2. Implications

 With liquidity crisis Netflix won’t be able to create enough cash to cover day to
day running of the company.
 In absence of lack of assets security, banks will be less willing to lend money
to Netflix which will create a significant problem as its major source of fund at
the moment. Also lack of short term investment will restrict Netflix from
earning interest or dividend.
 Increasing debt will lead to higher interest charges leading to increase in level
of gearing. (interest increased by 76% in 2018)
 A negative free cash flow shows lack of financial flexibility and no fund for
additional capital expenditure or investments so external fund( long
Term debt is required).

3. Mitigations
 Even with the increasing revenue, Netflix is not able to generate enough
cash which shows a poor cash management system. Netflix should spend
less on streaming content assets.
 Netflix should work on efficient management in decreasing operating assets.
Right now current assets is in increasing form and look for short term
investments where it can generate cash shortly.
 Improvement of debt to equity ratio to avoid high gearing.
  Look for more opportunity to improve fund like issuing new shares and
increasing prices.

4. Consequences to strategies
 Since Netflix is able to increase its customers(hence revenue) through
streaming content, putting restricting on it may lead to restriction in revenue
growth
 With increasing market in steaming content, if Netflix loses its focus from its
main aspects to other short term investment, it may lose its market share as
customer may turn to competitors
 Without long term debt it would be difficult for Netflix to survive in the market
in contrary to its cash flow status.
 It cost money to issue stock esp. taking taxes into account