I hope you're all staying safe and covering each others backs. - Manuel
I hope you're all staying safe and covering each others backs. - Manuel
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Why do we compare financial statements between other companies in similar industries?

Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency. We generally use benchmarking because we want to compare companies to previous fiscal years or other companies in similar industries (BLOOMENTHAL, 2020). Specifically, we compare companies' ratios to other similar companies' ratios because we aim to see how our selected company stacks to industry average ratios. For example, we may conduct a horizontal analysis and see that Company A obtains a moderate increase for their current ratio and net profit margin. However, we compare Company A to Company B and see that Company A is way below the industry average current ratio and profit margin. With this in mind, we may reevaluate whether how well we think Company A is performing. On the other hand, if we examined a company in isolation, we might obtain a net profit margin of 4 percent, as a strict example. Unfortunately, other than the horizontal analysis, this figure does not tell us much without seeing if 4 percent is good or bad for that industry.

 

After performing the company ratio comparison, I learned that Netflix mostly outperformed Amazon on the ratios or was reasonably close to Amazon's ratios for 2019. For example, regarding the "reasonably close" ratios, Netflix's current ratio in 2019 was approximately 82 percent of Amazon's current ratio for 2019—which does not seem to be that far off from Amazon's current ratio. Conversely, for the 2019 interest coverage ratio, Netflix's ratio was 45 percent of Amazon's interest coverage ratio, which is not good. Additionally, to Netflix's credit, they moderately outperform Amazon on the net profit margin, cash ratio, operating profit margin, return on equity, and return on total assets. Netflix heavily exceeds Amazon on the fixed asset turnover for 2019. Unfortunately, Netflix's debt-based ratios are much higher than Amazon's, which means they utilize debt financing more than equity financing than Amazon in 2019. For example, Netflix's Long-term Debt/Equity Ratio is over 500 percent higher than Amazon's ratio for 2019.

 

Regarding whether Netflix and Amazon legally and ethically report necessary information on their financial statements, the only information I was unable to find any mention of was inventory or dividends paid on Netflix's financial statements. For Amazon, I only could not find dividends paid for their financial statements. However, Amazon has not produced any dividends since its company inception (FONTINELLE, 2020). As for Netflix, according to their lack of Ex-Dividend Date and Dividend Yield on Yahoo Finance, it is unlikely that Netflix pays any dividends either (Netflix, Inc. (NFLX) Stock Price, News, Quote & History - Yahoo Finance, 2020). Concerning the inventory, I think they should report this on their financial statements because they still offer physical DVD rentals to customers—according to their company website (Rent Movies and TV Shows on DVD and Blu-ray - DVD Netflix, 2020). However, I think Netflix and Amazon provide all the information for stakeholders to calculate and evaluate their respective companies. Lastly, since Netflix and Amazon are public companies, they must follow numerous SEC-based regulations for reporting their financials. Not to mention that they need to utilize an unbiased, third-party accountant to audit their financial statements. Therefore, I feel confident that they are abiding by the necessary reporting standards for their shareholders.

 

References

BLOOMENTHAL, A. (2020). Ratio Analysis Definition. https://www.investopedia.com/terms/r/ratioanalysis.asp
EDGAR “Netflix” Search Results. (2020). https://www.sec.gov/cgi-bin/browse-edgar?CIK=1065280&owner=exclude

EDGAR “Amazon” Search Results. (2020). https://www.sec.gov/cgi-bin/browse-edgar?CIK=1018724&owner=exclude

FONTINELLE, A. (2020). Companies That Pay Dividends vs. Companies That Don’t. https://www.investopedia.com/ask/answers/12/why-do-some-companies-pay-a-dividend.asp

Netflix, Inc. (NFLX) Stock Price, News, Quote & History - Yahoo Finance. (2020). https://finance.yahoo.com/quote/NFLX/

Rent Movies and TV Shows on DVD and Blu-ray - DVD Netflix. (2020). https://dvd.netflix.com/


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