Introduction

This problem is based on Netflix Inc. and it is designed to underscore the power of financial ratios and the relationship between "numbers and strategy." Whether we are making a personal plan for retirement or we are leading an organization, when making decisions that involve financial resources and strategies, ratios are an important because they highlight relationships.

In the introductory paragraphs of their SEC Form 10-K, prepared for the 2018 fiscal year, Netflix describes their company as "... the world's leading internet entertainment service with over 139 million paid memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages." (Netflix Inc., 2018) Numbers are an essential part of the Netflix story.

Netflix was founded in 1997 on a business model that employed the then "new idea" of placing videos in mailers and mailing them to subscribers in return for small rents. Subscribers would take the videos out of the mailers, watch them on their players at home, and send them back to Netflix. The company has come a long way since 1997. Netflix is an outstanding example of a company that has continuously "reinvented itself" in response to challenges emanating from a rapidly changing environment. Still, their future success is in no way guaranteed. The excerpt which follows is taken from the 2018 10-K report Netflix filed with the SEC.

We are a pioneer in the internet delivery of TV shows and movies, launching our streaming service in 2007. Since this launch, we have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy TV shows and movies directly on their internet-connected screens. As a result of these efforts, we have experienced growing consumer acceptance of, and interest in, the delivery of TV shows and movies directly over the internet.

Our core strategy is to grow our streaming membership business globally within the parameters of our profit margin targets. We are continuously improving our members' experience by expanding our streaming content with a focus on a programming mix of content that delights our members. In addition, we are continuously enhancing our user interface and extending our streaming service to more internet-connected screens. Our members can download a selection of titles for offline viewing. (Netflix Inc., 2018)

Netflix has embraced the concept of providing original programming. Their programs and documentaries have been honored with Emmy, Golden Globe, and Academy Oscar awards.

Netflix Inc. 12 Months Ended Consolidated Income Statement (in thousands) Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Revenues $ 15,794,341 $ 11,692,713 $ 8,830,669 Cost of revenues 9,967,538 8,033,000 6,257,462 Gross Margin 5,826,803 3,659,713 2,573,207 Expenses: Marketing expense 2,369,469 1,436,281 1,097,519 Technology and development expense 1,221,814 953,710 780,232 General and administrative expense 630,294 431,043 315,663 Total Expenses 4,221,577 2,821,034 2,193,414 Operating income 1,605,226 838,679 379,793 Interest expense 420,493 238,204 150,114 Other income (expense) 41,725 (115,154) 30,828 Income before income tax expense 1,226,458 485,321 260,507 Income tax expense 15,216 (73,608) 73,829 Net income $ 1,211,242 $ 558,929 $ 186,678 Earnings per share $ 2.78 $ 1.29 $ 0.44 Dividend per share $ 0.00 $ 0.00 $ 0.00 Closing Market Price $ 259.28 $ 196.10 $ 124.96Netflix Inc. As of Consolidated Balance Sheet (in thousands) Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Current assets: Cash and cash equivalents $ 3,794,483 $ 2,822,795 $ 1,467,576 Current content assets, net 5,151,186 4,310,934 3,726,307 Other current assets 748,466 536,245 526,408 Total current assets 9,694,135 7,669,974 5,720,291 Non-current assets: Non-current content assets, net 14,960,954 10,371,055 7,274,501 Property and equipment, net 418,281 319,404 250,395 Other non-current assets 901,030 652,309 341,423 Total non-current assets 16,280,265 11,342,768 7,866,319 Total assets 25,974,400 19,012,742 13,586,610 Current liabilities: Current content liabilities 4,686,019 4,173,041 3,632,711 Accounts payable 562,985 359,555 312,842 Accrued expenses 477,417 315,094 197,632 Deferred revenue 760,899 618,622 443,472 Total current liabilities 6,487,320 5,466,312 4,586,657 Non-current liabilities: Non-current content liabilities 3,759,026 3,329,796 2,894,654 Long-term debt 10,360,058 6,499,432 3,364,311 Other non-current liabilities 129,231 135,246 61,188 Total non-current liabilities 14,248,315 9,964,474 6,320,153 Total liabilities 20,735,635 15,430,786 10,906,810 Owner's Equity: Preferred stock 0 0 Common stock 2,315,988 1,871,396 1,599,762 Accumulated other comprehensive loss (19,582) (20,557) (48,565) Retained earnings 2,942,359 1,731,117 1,128,603 Total owner's equity 5,238,765 3,581,956 2,679,800 Total liabilities and stockholders' equity 5 25,974,400 $ 19,012,742 $ 13,586,610