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Netflix (NASDAQ:NFLX) has had a rough month with its share price down 8.6%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Netflix’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Netflix is:
41% = US$10b ÷ US$25b (Based on the trailing twelve months to June 2025).
The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.41 in profit.
View our latest analysis for Netflix
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
To begin with, Netflix has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 13% also doesn’t go unnoticed by us. Under the circumstances, Netflix’s considerable five year net income growth of 22% was to be expected.
Next, on comparing with the industry net income growth, we found that Netflix’s reported growth was lower than the industry growth of 32% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Netflix’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
