Analyze how the liquidity situation changed over the last three years. Ratio analysis might help you here.
Over the years, the operating cash flows in 2012 were around $21 million, but in 2013 the operating cash flows showed an increase of above 400% in cash flows with operating cash flows of $97.8 million. In 2014, the cash flows from operations had decreased dramatically and the operating cash flows were only $16.5 million (Appendix 1). The company earned net profits of $266.8 million in 2014, $112.4 million in 2013 and $17.2 million for the year 2012 (Netflix, 2015). The profitability of the company increased over the period, but it was unable to generate positive operating cash flows equal to those profits. The operating cash flows were negative because of addition to stream content library that increased from 2.5 billion in 2012 to 3.7 billion for the year 2014 (Netflix, 2015).
However, the investing cash flows were also negative because of the nature of the investing activities, the cash outflows from investing activities were $42.9 million for the year ended 2014, $255.9 million for the year ended 2013 and $244.7 million for the year 2012 (Appendix 1). The reason behind the less negative cash flows in 2014 is that it had sold some of its assets in the year 2014; therefore the sale proceeds of those assets had not affected the financing cash flows to be negative with the amount as it was the last years (Netflix, 2015).
The financing cash flows are positive with a good amount, the cash inflows from financing activities were $ 541.7 million or the year ended 2014, $476.3 for the year ended 2013 and $5.6 million for the year ended 2012 (Appendix 1). The cash flows from financing activities were very high for the year 2013 and 2014 due to the debt financing of $500 million in 2014 and $400 million in 2013; in 2013, it had also repaid a debt of $219.3 million (Netflix, 2015).
The company also issued some equity instruments in all those three years, the proceeds from equity instrument were $60.5 million in the year 2014, 124.6 million in the year 2013 and $4.1 million in the year 2012 (Netflix, 2015). The company was able to raise the cash through financing activities for the year 2013 and 2014.
The cash flows at the start of the year 2012 were $508 million and 1.1 billion for the year ended 2014 (Netflix, 2015). The cash flow position increased only due to the issue of debt and equity in the year 2013 and 2014. The problem situation is that the company is not able to generate positive free cash flows for all three years. The free cash flows for the year 2014 were $126.7 million negative, $16.3 million negative for the year 2013 and $58.1 million negative for the year 2012 (Appendix 1). The company is not even able to generate free cash flows for it and the situation has even deteriorated through the passage of time. The company is not able to generate healthy operating cash flows therefore it is suffering from the negative free cash flows.
The cash flow coverage ratio of Netflix is not impressive, as it was able to generate only 0.67% of its total debts (short-term and long-term) for the year 2012 from its operations. The company had, however generated 2.4% of the total debts in 2013 but the ratio deteriorated in 2014 because it was able to generate only 0.32% of its total debt (Appendix 2). Its operating cash flows are very low as the debts are very high; the deterioration of the ratio in 2014 is due to the issuance of debts of $500 million for the year. Also, the operating cash flows declined in the same year.
The cash flow management has increased in 2013 and 2014 as compared to 2012. The cash flow generation over the period was negative by the amount $217.8 million, but it was positive for the year 2013 by the amount $314.7 million and for the year 2014 it was $508.6 million. The positive cash flows show that the company has a healthy amount of cash for the investment purpose and any other purpose. The increase is however due to the debt issuance, but the company is able to issue debts, which also indicates that the company has a good reputation in the market....................
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