How To Analyze Netflix's Balance Sheet (NFLX, GOOG)

Netflix Inc. (NFLX) is an on-demand service provider of hundreds of television shows and movies that can be streamed instantly. With streaming services, a user gets to watch a television show or movie whenever he wants with no download. It is possible to stream Netflix on a smartphone, tablet, smart TV, computer and gaming console. As long as the person has access to Wi-Fi or data, he can watch his favorite movies or television shows directly on one of these devices.

When considering the positives and negatives of a public company the size of Netflix, there are many things to take into account. One of the most important aspects of evaluating a company is its financial condition. For companies such as Netflix, evaluating the financial condition through an analysis of the balance sheet is one of the best approaches. By understanding Netflix's balance sheet, an investor, creditor, analyst or stakeholder can understand how well-positioned the company is to maintain and increase success.

The first piece of Netflix's balance sheet to review is cash and cash equivalents. With more cash, a company is able to acquire companies, pay debt, repurchase stock and pay dividends. In 2014 for example, Netflix had over $1 billion in cash and cash equivalents, which is the norm over the long-term. This means the company has high liquidity that can be used to strengthen or expand the business. While the company made investments in licensed streaming content that reduced cash and cash equivalents in 2015, it expects to further increase its cash on hand.

Return on assets (ROA) is called a mixed ratio because it uses net income in the numerator and total assets in the denominator; it is used to measure a management team's ability to generate revenue for every dollar of assets at its disposal.

For the year end 2014, Netflix had a return on assets of 2.43%, which is good considering the amount of assets invested in future growth. When analyzing Netflix's balance sheet, it is important to measure this number against prior years and quarters to see the growth of return over the long-term.

After analyzing the amount of cash Netflix has at its disposal and its ability to turn its assets into profits, it is important to understand its mix of debt and equity. By analyzing this number, it is possible to see how leveraged Netflix is and how many debt obligations it needs to repay.

While a company with success and cash on hand such as Netflix may not place too much stock into this metric, it helps show an investor or creditor what needs to be repaid in the long-term. Highly levered firms have a high risk of default, but Netflix should be fine.

The last thing to look at is Netflix's off-balance sheet activity. For Netflix, this activity is actually the future cost of revenue and has been increasing through the first two quarters of 2015.

Prior to a title going live on Netflix, there are content costs associated with licensing and getting it ready for streaming distribution. Under U.S. generally accepted accounting principles (GAAP), Netflix is allowed to categorize these liabilities and assets as an off-balance sheet activity, and they are not included in its balance sheet until the title goes live.

Always look at Netflix's off-balance sheet activity, but do not be concerned if the activity is high. This might mean Netflix is investing in future growth through an increased amount of content.

Netflix is a unique company, but it has some comparable competition. Streaming delivery services such as Hulu, HBO Go and Amazon Instant Video are very similar to Netflix's business model and have similar balance sheets due to content licensing and streaming capabilities. When it comes to Netflix's ratios and cash and cash equivalents, two comparable companies are Google and Apple due to their high amounts of cash and assets.