Netflix Might Be Twisting Its Cash Flow Stateme
Business and Management
Submitted By saulybets
Netflix Might Be Twisting Its Cash Flow Statement
Aug. 18, 2013 3:06 AM ET | 25 comments | About: Netflix, Inc. (NFLX)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
All investors know that they must conduct a rigorous analysis on a company's cash flow statement before making any serious investment decision. The statement of cash flow in the financial report is usually a much better gauge of the financial position of a company than the standard EPS. I believe thatNetflix (NASDAQ:NFLX) is playing suspicious accounting games with its cash flow statement. And it's very important for investors to be aware of that.
Netflix and its content library
Netflix reported its quarterly earnings after the trading session on July 22nd. The company beat analysts' forecasts with $29 million in profit, or 49 cents per share, and up from $6 million a year earlier. Analysts on average expected $0.40, according to Thomson Reuters. Revenue for the quarter was $1.07 billion, up 20% from $889 million a year earlier.
In a letter to shareholders, Reed Hastings, the company's CEO, stated -"Our Product Innovation teams greatly enhanced the features and delivery of our service during the quarter, as well as improved discovery and merchandising of our content library."
It's no coincidence that Hastings emphasizes the importance of the content library to the company. It's the company's main asset and the source of the lion's share of profits. It's the most essential part of Netflix's business.
The tricky part
Part of Netflix's business is to purchase DVDs in bulk and then rent them out to its end users. The proper way to account for this massive purchase is to record it as an asset on the balance sheet, and record the cash expense under "cash flow from operating activities," because this purchase...