Negative free cash flow
Netflix (NFLX) had a free cash flow of -$506 million in 3Q16, compared with -$252 million in 3Q15. The company indicated that it plans to raise debt of around $2 billion later this year or early in 2017.
Netflix had cash of $1.3 billion on its balance sheet at the end of 3Q16 and gross debt of $2.4 billion. The company expects to generate free cash flow of around -$1.5 billion in 2016, and to raise more debt to produce its own content, which requires more cash up front.
In its fiscal 3Q16 earnings call, Netflix stated that it does not expect its free cash flow to increase every quarter. As its operating income increases, it hopes to fund its free cash flow organically.
Target capital structure
At the Goldman Sachs Communacopia Conference this year, Netflix stated that it believes it was underleveraged from an optimal capital–cost to capital structure. It further explained that its peers in the media sector were more leveraged and that it still has room to take on more debt.
Netflix has a debt-to-capitalization ratio of 0.05. In the long term, it expects to take this leverage ratio to 0.2.
As for bonds, the company stated that “they’re actually trading one to two grades better than our rating. So, I think that’s the market acknowledging that Netflix is a strategic asset. If there is any most of that debt is especially in a high yield situation is priced off of what if distress situation so, if you look at our interest coverage, if you look at the back that would be in any distress situation, a desired asset.” It’s important to note here that the company has a low debt-to-market capitalization ratio, which indicates that it has less debt than its market value.