P3-5l.Analysis and Interpretation of ROE and RNOA with No Noncont rolling Interest The 2018 balance sheets and income statement for Netflix Inc. follow. Refer to these financial statements to answer the requirements.

NETFLIX INC.

Consolidated Statement of Earnings For Year Ended December 31 , $ thousands Revenues ........................... .. ... . .... .. . .. . . .. .

Cost of revenues ....................... . .. . ....... . ..... .

Marketing .. . .. .... .... . .. .. .. . ........ • .. • ....•..•..•...

Technology and development ............. . .. . ..... . . .. .... .

General and administrative ................ . .. . .... . .. .. . . .. .

Operating income ....... . .. ...... . .... .... . .. . .. . .... . .. . .

Other income (expense)

Interest expense .................... ... .. . .... .. . .... .. .

Interest and other income .. .. ........... .... . ... . .. . .. . . . .

2018

$15,794,341 9,967,538 2,369,469 1,221 ,814 630,294 1,605,226

(420,493)

41 ,725 Income before income taxes . . . . . . . . . . . . . . • . . • . . . . • . . • . . • . . . 1,226,458 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,216 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,211,242 NETFLIX INC.

Consolidated Balance Sheets in thousands, except par value 2018 Current assets Cash and cash equivalents ...... . .. ..... •. ...

Current content assets, net .............. . ... .

Other current assets ................... • .. • .

Total current assets ................... . .. . .

Noncurrent content assets, net. . .. . ...... .. • .. • .

Property and equipment, net .............. • ..•.

Other noncurrent assets . .. .. .. . ...... . ...... . .

$ 3,794,483 5,151,186 748,466 9,694,135 14,960,954 418,281 901,030 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,974,400 Current liabi lities Current content liabilities ...... . .. . ...... • ....

Accounts payable ..... . .. .. .. . ...... .. • ....

Accrued expenses ... . . . .......... . . . ..... .

Deferred revenue ..................... • .. • .

Total current liabilities .................. . .. . .

Noncurrent content liabilities .............. . ... .

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . .. . .. .

Other noncurrent liabilities . .. . .......... ...... .

Total liabilities .. ... ......... . .. ... .... .. • ..•.

Stockholders' equity Preferred stock, $0.001 par value ........ ... . .. .

Common stock, $0.001 par value .. .. .. .. . ...... .

Accumulated other comprehensive loss .... ...... .

Retained earnings ...................... • . . • .

Total stockholders' equity . . ............... • . . ..

$ 4,686,019 562,985 477,417 760,899 6,487,320 3,759,026 10,360,058 129,231 20,735,635 0

2,315,988

(19,582)

2,942,359 5,238,765 Total liabilities and stockholders' equity. . . . . . . . . . . $25,974,400 2017

$ 2,822,795 4,310,934 536,245 7,669,974 10,371 ,055 319,404 652,309

$19,012,742

$ 4,173,041 359,555 315,094 618,622 5,466,312 3,329,796 6,499,432 135,246 15,430,786 0

1,871 ,396

(20,557)

1,731,117 3,581 ,956

$19,012,742 Required

a. Compute net operating profit after tax (NOPAT) for 2018. Assume that the combined federal and state statutory tax rate is 22%.

b. Compute net operating assets (NOA) for 2018 and 2017.

c. Compute RNOA and disaggregate it into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018; confirm that RNOA = NOPM x NOAT.

d. Compute net nonoperating obligations (NNO) for 2018 and 2017. Confirm the re lation: NOA= NNO +Shareholders' equity.

e. Compute return on equity (ROE) for 2018.

f. Infer the nonoperating return component of ROE for 2018.
g. Comment on the difference between ROE and RNOA. What does this relation suggest about Netflix 's use of equity capital?