Is Netflix Inc (NASDAQ:NFLX) A Financially Sound Company?

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Netflix Inc (NASDAQ:NFLX) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. Today we will look at Netflix’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into NFLX here. View our latest analysis for Netflix

Does NFLX produce enough cash relative to debt?

NFLX has built up its total debt levels in the last twelve months, from US$3.36B to US$6.50B , which is made up of current and long term debt. With this rise in debt, NFLX's cash and short-term investments stands at US$2.82B for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of NFLX’s operating efficiency ratios such as ROA here.

Does NFLX’s liquid assets cover its short-term commitments?

Looking at NFLX’s most recent US$5.47B liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$7.67B, leading to a 1.4x current account ratio. Usually, for Online Retail companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does NFLX face the risk of succumbing to its debt-load?

Considering Netflix’s total debt outweighs its equity, the company is deemed highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. By measuring how many times NFLX’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In NFLX's case, the ratio of 4.01x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes NFLX and other large-cap investments thought to be safe.

Next Steps:

NFLX’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for NFLX's financial health. Other important fundamentals need to be considered alongside. You should continue to research Netflix to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for NFLX’s future growth? Take a look at our free research report of analyst consensus for NFLX’s outlook.
2. Valuation: What is NFLX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NFLX is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.