Introduction
International finance is the interaction of money between two or more companies which focuses on the areas such as foreign exchange rates and currency volatility. In the current era of this market where the use of digital tools allows an organisation to be able to procure its product and services for the global market. The following assignment is based on an analysis of various aspects of the US-based company named Netflix. This company is an entertainment-based American subscription streaming services and Production Company. This company offers quality films and television series through distribution sales and its own as well which is known as Netflix original. Moreover, this company aims to “Entertain the world”. In order to meet its organisational goal, this company operates in 190 countries with more than 30 languages (Netflix.net, 2021) this study aimed to highlight the two major development of Netflix and analyse the financial position of the company through effective accounting tools such as ratio analysis
Section A: Two recent development
Development one: change from HTTP to HTTPS encryption for better privacy
In the financial year 2011, this company first launched mobile apps and services for the IOS through which this company aims to increase the number of customers and increase its market reach. As argued by Perez-Vega et al. (2021), this has a positive impact on the customer base and the global brand value. However, operating on an online platform has a chance of data breach. Apart from this, the high potential threat to customer privacy is another major issue which the company has faced. In order to minimise these threats, this company changed its security and data management from HTTP to HTTPS in 2016 through which better assurance to the customer about their confidentiality can be ensured.
Impact:
Analysis of the impact of this change on the company has been found that the customer relationship management has been increased due to this development (Agyei et al. 2020). Moreover, in an analysis of the number of countries it operates in the financial year 2015 it has been found that this company operates only in 50 countries. Change from HTTP to HTTPS leads to a positive impact on the customer perception of this company which increases the number of subscribers from 62.7 in 2015 million to 99 million by 2017 (Netflix.net, 2021). This signifies that procuring high security and ensuring customer confidentiality leads to a positive impact on the financial health of the company.
Development two: covid -19
Covid-19 has a significant impact on the financial performance as well as its customer base. Due to the pandemic, various subscription-based online platforms such as Amazon Prime and Disney have emerged which creates a barrier for this company to operate its activity in an effective way. Moreover, due to this pandemic work environment of this company has been affected which has had a negative impact on its overall competitiveness (Rasool et al. 2021). However, during this pandemic, the company has a wider range of scope to procure huge quality of services to increase its profit and financial performance.
Impact:
The launch of high-quality entertainment television series such as Squid games and money heist during the pandemic period leads to a boost in customer base and profitability. Revenu fr\or October, November and December has been increased by 16%. Moreover, quarterly profit has increased by 12% and reached 607 million USD (Netflix.net, 2021). Moreover, in the financial year 2019, the number of subscribers increased from 167.09 million to 221.84 million in the financial year 2021.
(Source: Statista.com, 2022)
The impact of covid-19 can be clearly shown from the figure above given in which it has been highlighted that Netflix has a total number of subscribers in quarter 1 stood at 148.86 million which has increased continuously and stood at 221.64 million in quarter 1 of 2022 (statista.com, 2022). Based on this it can be seen that the changes and more focus on better quality of services during pandemics lead to a positive impact on the financial health of the company.
Section B: Source of finance and dividend policies
Dividend policies
Dividend policy refers to the police which has been aided by an organisation to pay dividends to its shareholders. It is an effective tool through which an organisation can be able to increase its market value in the global market. A company which has effective dividend police reading payment of dividends leads to attracting potential investors to its business activity. Analysis of the significance of the dividend policies has been found that an effective dividend policy leads to meeting the financial requirements of the company in a systematic way. Analysis of the Netflix dividend payout policy signifies that this company has no dividend policy as this company does not pay any dividend to its shareholders. Netflix has not anticipated any cash dividend or any type of dividend which is due to high investment in content. Due to the high amount of cost of its content this company has not declared any investment in the current financial years as well in the upcoming future as well.
Sources of finance
Source of finance refers to the source through which an organisation can be able or procure its financial requirement of a company. As cited by Fanea-Ivanovici (2018), analysis of the source of finance through which an organisation can be able to meet its financial requirement it has been observed that there are two major sources named internal source of finance is retained earnings and external source of finance is debt capital or loan capital, equity capital. Analysis of the source of finance of Netflix has been found that this company uses both sources of finance for operating its business activity in the global market. In order to utilise competitive advantage in the business, the market is quite necessary for an organisation to adopt an effective matrix through which the amount of risk can be minimised.
Debt capital: this is a source of loan capital where a company borrows funds from various financial institutions such as a bank, investment institution and insurance company. As opined by Polzin et al. (2021), Under this source of finance, the company has been bearing a fixed amount of interest on the borrowed funds. Analysis of the debt capital of the company in the financial year 2020 and 2021 it has been found that the company has 5,809,095 thousand USD in the financial year 2020 which has been reduced in the financial year 2021 and stood at 4,693,072 thousand USD. Based on this it has been found that the company has reduced its debt capital in the financial year 2021 which reduced the financial budget as well and attracted shareholders to its company.
Equity capital: it is another source of external finance in which a company issues its shares can be preferred or ordinary to allocate funds for its business. If a company issues preference shares it has been paying a fixed amount of dividend to its preference shareholders (Banga, 2019). Analysis of company shareholders has found that the company’s total shareholder equity stood at 11,065,240 thousand USD in 2020 which will increase to 15,849,248 thousand USD in 2021 (wsj.com, 2021). This highlights that the company has more facets in using its own capital over loan capital. The amount of risk is quite lower than loan capital as the company has not any financial burden on it.
Retained earning: it is an internal source of finance in which the company utilises its amount which stood in the reserve and surplus of the company (Mpofu and Sibindi, 2022). Analysis of the retained earnings of Netflix has found that the company stood at 7,573,144 thousand USD and it increased to, 573,144 thousand USD. increase in retained earnings positively impacts the financial stability of the company in the global market.
Based on an analysis of the source of finance of the company it has been found that Netflix has effectively used its different sources of finance to meet its financial requirement of the company. Based on this, Netflix is being able to increase its overall performance of the company in global market.
Section C: ratio analysis
Liquidity analysis:
Company liquidity performance can be measured through the help of the current ratio and quick ratio. As opined by Sari and Sedana (2020), this financial matrix assists internal and external parties of the company in assessing the liquidity society of the company. Based on an analysis of the current ratio of Netflix, it stood at 1.25 in the financial year 2020 which has reduced in the financial year 2021 and stood at 0.95 (wsj.com, 2021). A reduction in the current ratio negatively impacts the financial performance of the company.
| Liquidity Ratio | 2021 (million USD) | 2020(million USD) | ||
| Current Ratio | Current Asset/
Current Liabilities |
Current Asset | 8,070 | 9,762 |
| Current Liabilities | 8,489 | 7,806 | ||
| Current ratio | 0.95 | 1.25 | ||
| Quick Ratio (Acid | (Current Asset – inventories)/
Current Liabilities |
Current Asset | 8,070 | 9,762 |
| Inventories | 837 | 656 | ||
| Current Liabilities | 8,489 | 7,806 | ||
| Quick Ratio | 0.85 | 1.17 |
Table 1: liquidity ratio
(Source: Self- made)
On the other hand, an analysis of the quick ratio depicts that the liquidity performance of this company has reduced from 1.17 to 085 in the financial year 2021. This signifies that the operational efficiency of Netflix has been reduced which need not be booted through better working capital management.
Profitability analysis
Profit maximisation is the core activity of a company through which an organisation can be able to survive on the current edge of market competition. The profitability of Netflix has been measured through the gross profit margin and operating profit margin. As cited by Rashid (2018), Gross profit margin highlights the amount of profit before chagrin various operating and non-operating income and expenses of the company. Based on the gross profit margin company profitability through sales can be assessed. Analysis of the gross profit margin of Netflix highlights that the gross margin in products or services has increased from 38.89% to 41.64% which is quite beneficial for the company.
| Particulars | 2021(million USD) | 2020 (million USD) | ||
| Gross profit margin | Gross Profit/ x 100
Total Revenue |
Gross profit | 12,365 | 9,720 |
| Total Revenue | 29,698 | 24,996 | ||
| GPM | 41.64 | 38.89 | ||
| Operating profit margin | Operating Profit/ x 100
Total Revenue |
Operating profit (Earnings from Operations) | 6,195 | 4,585 |
| Total Revenue | 29,698 | 24,996 | ||
| OPM | 20.86 | 18.34 |
Table 2: Profitability ratio
(source: self- made)
Analysis of the operating profit margin has found that the Netflix operating profit margin has increased to 20.86% from 18.34%v which positively impacts the financial performance of this company in the global market. Based on this, it has been observed that the profitability of the company has increased in fiscal 2021 as compared to 2020 due to an increase in the total revenue of the company (wsj.com, 2021). As of the financial year 2020, this economy has total revenue of 24,996 million USD which has increased in the financial year 2021 and stood at 296968 million USD, an increase in the total revenue of the company caused an increase in gross profit margin and operating profit margin (Jihadi et al. 2021). Moreover, an increase in operating profit margin has also highlighted better control of the company on operating expenses through which it can be able to increase its profit margin.
Efficiency ratio
Efficiency ratio highlights the company’s ability to use its resources in terms of generating revenue and maximising sales. As cited by Sukmawardini and Ardiansari (2018), the efficiency of a company can be highlighted through different financial matrices such as asset turnover ratio and inventory turnover ratio. Based on an analysis of the asset turnover ratio of Netflix it has been observed that the company asset turnover ratio stood at 0.64 in the financial year 2020 which has slightly increased and stood at 0.67 (wsj.com, 2021). Though there is an increase in the asset turnover ratio of the company, its performance and efficiency in terms of the utilisation of its resources is quite low which needs to be improved.
| Efficiency Ratio | 2021 (million USD) | 2020 (million USD) | ||
| Asset Turnover | Revenue/
Total Assets |
Revenue | 29,698 | 24,996 |
| Total assets | 44,585 | 39,280 | ||
| asset turnover ratio | 0.67 | 0.64 | ||
| Inventory Turnover |
inventory/cogs *365 |
costs of goods sold | 17,333 | 15,276 |
| inventory | 837 | 656 | ||
| inventory turnover ratio | 17.63 | 15.67 |
Table 3: Efficiency ratio
(source: self- made)
On the other hand, an analysis of the inventory turnover ratio highlights an increase in the total days of holding inventory from 15.67 to 17.63 days. This highlights that the efficiency of Netflix has been reduced in the financial year 2021 as compared to the financial year 2020.
Investing ratio
Investment ratio highlights company performance in terms of meeting stakeholders’ expectations of its company. As argued by Markonah et al. (2020), matrices such as Earning per share and debt-equity ratio highlight the company’s financial leverage and its return policies to its shareholders. The debt-equity ratio highlights the capital structure of the company through which investors can be able to assess whether the company utilises its own capital or loan capital. The debt-equity ratio of Netflix has been reduced from 1.60 to 1.08 in financial (wsj.com, 2021). This leads to attracting potential inventors to its company as a lower debt-equity ratio highlights a lower amount of risk.
| Investing Ratio | 2021 (million USD) | 2020 (million USD) | ||
| Debt Equity ratio | Total liabilities /
Total Shareholders’ Equity
|
Total liabilities | 17,102 | 17,755 |
| Equity | 15,849 | 11,065 | ||
| Debt Equity ratio | 1.08 | 1.60 | ||
| EPS | net earnings *100 /equity
|
net earning | 5,116 | 2,761 |
| Equity | 15,849 | 11,065 | ||
| EPS | 0.32 | 0.25 |
Table 4: Investment ratio
(Source: Self- made)
Analysis of earnings per share of the company has been found that the company has increased its EPS from 0.25 to 0.32 which increases shareholder engagement in its business. Increases in EPS occurred due to an increase in the amount of net profit. As it can be seen from the above table the net profit of this company stood at 2761 million USD in 2020 and it increased to 5116 million USD in the financial year 2021 (wsj.com, 2021). This provides a competitive advantage to Netflix in the global market.
Conclusions
Based on an analysis of the two recent developments in Netflix it can conclude that these two development companies ensure better security to customer confidentiality and increase its overall customer base. On the other hand, an analysis of the source of finance of this company can further conclude that this company has reduced its total debt and increased its retained earnings and equity. This leads to minimising the amount of risk and finance costs. Based on this, Netflix will be able to boost its profitability. Moreover, an analysis of different financial aspects of a company through ratio can further conclude that the liquidity efficiency of this copy has been reduced due to the pandemic. However, commonly profitability and investment ratio has been increased which positively impacts the financial performance of the company. The company can be able to increase its stakeholder’s engagement and competitiveness in the global market.
References
Journals
Perez-Vega, R., Kaartemo, V., Lages, C.R., Razavi, N.B. and Männistö, J., 2021. Reshaping the contexts of online customer engagement behaviour via artificial intelligence: A conceptual framework. Journal of Business Research, 129, pp.902-910.
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Rasool, A., Shah, F.A. and Tanveer, M., 2021. Relational dynamics between customer engagement, brand experience, and customer loyalty: An empirical investigation. Journal of Internet Commerce, 20(3), pp.273-292.
Fanea-Ivanovici, M., 2018. Crowdfunding—A Viable Alternative Source of Finance for the Film Industry. Rev. Econ, 70, pp.79-88.
Polzin, F., Sanders, M. and Serebriakova, A., 2021. Finance in global transition scenarios: Mapping investments by technology into finance needs by source. Energy Economics, 99, p.105281.
Banga, J., 2019. The green bond market: a potential source of climate finance for developing countries. Journal of Sustainable Finance & Investment, 9(1), pp.17-32.
Mpofu, O. and Sibindi, A.B., 2022. Informal Finance: A Boon or Bane for African SMEs?. Journal of Risk and Financial Management, 15(6), p.270.
Sari, I.D.M. and Sedana, I.B.P., 2020. Profitability and liquidity on firm value and capital structure as intervening variables. International research journal of management, IT and Social Sciences, 7(1), pp.116-127.
Rashid, C.A., 2018. The efficiency of financial ratios analysis for evaluating companies’ liquidity. International Journal of Social Sciences & Educational Studies, 4(4), p.110.
Jihadi, M., VILANTIKA, E., HASHEMI, S.M., Arifin, Z., BACHTIAR, Y. and Sholichah, F., 2021. The effect of liquidity, leverage, and profitability on firm value: Empirical evidence from Indonesia. The Journal of Asian Finance, Economics and Business, 8(3), pp.423-431.
Sukmawardini, D. and Ardiansari, A., 2018. The influence of institutional ownership, profitability, liquidity, dividend policy, and debt policy on firm value. Management Analysis Journal, 7(2), pp.211-222.
Markonah, M., Salim, A. and Franciska, J., 2020. Effect of profitability, leverage, and liquidity on the firm value. Dinasti International Journal of Economics, Finance & Accounting, 1(1), pp.83-94.
Websites
statista.com, 2022, Number of subscribers of Netflix pre and post-pandemic available at: https://www.statista.com/statistics/250934/quarterly-number-of-Netflix-streaming-subscribers-worldwide/ [accessed on 22 June 2022]
wsj.com, 2021, financial information of Netflix available at: https://www.wsj.com/market-data/quotes/NFLX/financials/annual/balance-sheet [accessed on 22 June 2022]
Netflix.net, 2021 annual report available at: https://ir.Netflix.net/financials/annual-reports-and-proxies/default.aspx [accessed on 22 June 2022]
