Organizational Context
The survival of any firm in the highly competitive global market, where there are a number of firms that provide the same products and services, solely depends on how the affairs of the firm are managed (Smith, 2018). The level of efficiency of management of a company can be indicated by the trend of financial generation, and the extent to which the fund generated in a given financial year deviates from that of the previous year. The analysis of financial data provides a framework through which the performance of the company can be predicted so that the managers can enact proper measures for the improvement of organizational performance.
Moreover, the analysis of the financial performance of a company can also help the management to incorporate other modes of operation that are in line with technological changes in business, and the general adjustments in the modes of operation in the global market. Therefore, financial analysis of Netflix can provide crucial information for the formulation of new business policies, and the adjustment of the existing laws of operation, so that the general revenue-generation capacity of the company can be improved.
Netflix offers video streaming services, produces films, and distributes them through selected television channels to the global market (Blackburn, Eisenach, & Soria, 2019). The products and services sold by Netflix target the whole market, and this is achieved by providing a platform through which the users can conveniently search for their desired content and live stream them from any point around the globe. Netflix offers a wide range of products and services as a strategy to enhance market coverage and revenue generation capacity.
For instance, Netflix Inc. provides cartoon videos for entertainment, and these can be watched by people of any age. Motivational videos, sermons, action movies, romantic movies, and adventure films are also available on Netflix Inc. The product mix ensures that consumers have Netflix as a one-stop solution to all their needs.
Netflix Inc. can be considered to be specialized in the provision of mass media and entertainment services. The company’s management can, therefore, make decisions that are straightforward and conveniently applicable in solving any problems that the company may experience in the global market. For example, assuming that Netflix Inc. engaged in other business activities such as the sales of electronics, it would be comparatively difficult for the management to make decisions aimed at the improvement of the financial performance of video production and sales, in the short run (Blackburn et al., 2019).
This is because the management would be compelled to adjust their decisions to cover the other products’ line. However, with the specialization in mass communication, the firm can swiftly draft and implement decisions that have a direct impact on the streaming of videos. Netflix Inc. has a commercial platform that considers the demands of everyone of any age. It can, thus, be considered a provider of universally demanded products and services.
The decisions made by the company’s management must, therefore, consider the demands of all the users (Smith, 2018). Any wrong decision that does not favor the interests of any section of the consumers can cause a significant reduction in finance generation. Managerial decisions should also consider the interests of people of different cultural, economic and social backgrounds to ensure that at no point is a section of the users limited to the access of the services and products. Moreover, the central location of Netflix Inc. and the global dispersion of regional management centers also enhance the process of decision-making. Netflix Inc. is, therefore, able to formulate a decision quickly and implement it within the shortest time.
The organizational management of Netflix Inc. has a form of hierarchy, with provisions for possible adjustments. This enhances flexibility in making adjustments in response to changes in the global market. The main functional groups in the structure of management of Netflix Inc. include the chief executive officer, legal team, talent management, finance, product development, content creation, and communications departments (Smith, 2018).
The company’s management based on product groups includes original programming and other content. The original programming department is responsible for the creation of software for the payment systems and streaming of videos, or any enhancement to the mode of operation. The department responsible for the creation of other content makes other programs that are necessary for efficient operations, such as the inclusion of selected adverts. The company has a section for the management of domestic streaming, and another for international streaming, to ensure that the needs of all users are provided in the most efficient manner.
The management system of Netflix Inc. is devolved and specialized, and this enhances the efficiency and accuracy in the provision of financial data (Smith, 2018). Each department has a specific channel through which it reports its financial data, hence it is easier to identify the source of any error. The devolved management system also enhances the identification of any department that is operating below the expected capacity, hence the necessary adjustments are implemented swiftly and accurately.
Moreover, having different departments to manage domestic and international markets ensures that the needs and preferences of clients in the international market are handled in time, hence building a strong customer-client and loyalty in the global market. A good rapport with the clients boosts the company’s revenue-generation capacity.
Recent Financial Performance
The financial data of Netflix Inc. for the previous 3 years shows that the cash position of the company increased by 34.42% between the years 2017 and 2018, and 32.26% between 2018 and 2019 (Macrotrends, 2020). Moreover, the total debt increased by 59.40% between 2017 and 2018, and 42.75% between 2018 and 2019. Shareholder equity also increased by 114.40% between 2017 and 2018 but reduced to 54.10% between 2018 and 2019.
Table 1: Financial Data – Netflix
The rate of increase in the current ratio was 6.43% in 2018, but the ratio decreased by -39.60% in 2019. The negative value of the current ratio indicates that Netflix Inc. Was not in a position to settle its short-term loans using the available current assets. The company was therefore at the risk of receivership, as a means through which another company which it owes some cash would recover its finances.
Moreover, the data also indicates an increase in the debt/equity ratio between 2017 and 2018, by 6.43%, followed by a sharp decrease between 2018 and 2019, by -1.57%. However, the day sales outstanding (DSO) increased by 4.35% between 2017 and 2018, but the rate of DSO improvement decreased to 4.05% in 2019.
On the other hand, Netflix Inc. recorded a 116.7% profit increase between 2017 and 2018 but experienced a reduction in profit generation by 54.13% in 2019 (Macrotrends, 2020). However, the rate of change in the generation of gross profit increased by 59.21% between 2017 and 2018, and 32.43% between 2018 and 2019.
The relation between the gross income and net profit indicates that the company’s expenditure on taxes and rates increased in 2019, leading to a sharp decrease in the profit generation capacity. The general reduction in the rates of profit generation as indicated in figure 1, maybe due to the prevailing increase in the tax and rent levies as a result of inflation. The general trend of cash generation indicates an increase in the cash position of the firm. An increase in debt is also a show of the increasing capacity of the operation of Netflix Inc.
Shareholder equity, debt-equity ratio, DSO, net and gross profits also show an upward trend. The general increase in the financial indicators of the firm’s performance can be attributed to the growing demand for Netflix products, and the intense advertisement campaigns conducted by the company. Therefore, it can be concluded that the company is thriving in the mass media and entertainment industry.
Current Financial Health
The financial data shows that Netflix Inc. has an increasing cash generation, with a high but almost constant debt-equity ratio. The data also indicates an increase in depreciation and amortization. The high debt-equity ratio shows that Netflix Inc. finances most of its activities using borrowed finances, accompanied by an increase in depreciation and amortization.
The data also indicates an increase in liabilities with a comparatively low extent of profit generation. However, the price to earnings (PE) ratio decreases over the 3-year period as shown in figure 2, indicating that the price of shares in relation to the shareholder’s earnings is approaching equilibrium.
However, a further decrease may indicate a stagnated value of shareholder earnings. Therefore, the company faces market instability if adjustments are not made to enhance efficiency in finance generation.
References
Blackburn, D., Eisenach, J., & Soria, B. (2019). The impact of online video distribution on the global market for digital content. Web.
Macrotrends. Netflix financial ratios for analysis 2005-2019 – NFLX. Web.
Smith, K. (2018). The importance of social media in business. Lyfe Marketing, 65(3), 1-6.