Upon its launch in 1997, Netflix Inc (NFLX) created a model for the future of television. Netflix is an over the top Internet streaming media provider comparable to Amazon Prime Instant Video, Hulu and YouTube, as well as a DVD and Blu-ray disc provider through the U.S. Postal Service. Netflix’s success is evident through its 60 million subscribers and through its continual upsurge in profit and soaring stock prices, both of which are reflected in Netflix’s income statement.

Importance of Income

The income statement is one of the three most crucial financial statements produced to evaluate the financial condition of a company. The income statement determines a summative supposition of a company’s overall profitability by reporting on its attained revenue every fiscal period and then cross-examining it against its corresponding expenses for the same fiscal period. By evaluating a company’s profitability, the income statement respectively reports on a company’s earnings per share (EPS). A company’s reported EPS is a required item line on its income statement if the company’s stock is publicly traded.

The Main Components

Like all income statements, Netflix’s shows its total profitability through its net income, its EPS and its outstanding common shares. Net income is calculated in four steps by looking at the first line on Netflix’s income statement, revenue, which shows the amount of money Netflix acquired during the fiscal period of the income statement. As of March 2015, Netflix’s revenue totaled $1.57 billion, but its operating income totaled $97 million due to $1.48 billion in operating expenses. Netflix’s expenses stem from cost of revenues (media content expenses), marketing (the costs of repeatable methods that prompt customer acquisition and determine sales), technology and development (the costs of modes and infrastructure for streaming content to subscribers), and general and administrative costs, including legal fees, personnel costs, professional fees and other operational costs.

In addition to its operating income, net income is calculated by including Netflix’s other income or expense totaling -$59 million from interest-related expenses. Having negative net interest supposes that Netflix paid more interest on its debt that it received in interest from its investments. The third step in computing net income mandates calculating Netflix’s income before income taxes – the combined total of operating income and other income – which nets $38 million. The last step in calculating net income requires that any tax benefit or provision for income taxes be subtracted from the income before income taxes; Netflix’s net income totals $23 million.

Lastly, Netflix’s EPS is calculated by dividing its net income by the number of common shares outstanding during the period. As Netflix has convertible shares, stock options and warrants, Netflix must report on its diluted EPS because it displays the potential earnings available per common share if all convertible shares, warrants and options were to be exercised. The EPS figures in March 2015 were 39 cents for basic and 38 cents for diluted. The weighted-average common shares outstanding were 60,518 basic and 61,973 diluted.

Current Analysis

Netflix reported a net profit of $267 million in 2014 and increased by $154 million from 2013. However, Netflix’s operating income increased by $174 million in 2014; its expenses have increased, likely due to a diminishing consumer base in 2012 after the company announced a change in its pricing in July 2011. In spite of this, Netflix's overall basic EPS in 2014 stood at $4.44, an increase of 52% from 2013, when it stood at $1.93. Similarly, Netflix’s diluted EPS increased by 54% in 2014 from $1.85 to $4.32. As revenue, net income and EPS continue to grow; in spite of the increase in operational expenses, the income statement contends that the company continually generates strong profitability ratios.

For more on Netflix business strategy, check out Should Netflix Consider Commercials And Ads?

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