Order ID | 53563633773 |
Type | Essay |
Writer Level | Masters |
Style | APA |
Sources/References | 4 |
Perfect Number of Pages to Order | 5-10 Pages |
Case Study of Financial Issues in Organizations
Case, Study, Financial, Issues, Organizations
Cases in Finance (presentation)
Outline Case Introduction 3 Identification of the challenge 4 Main facts and events of the
core study 5 Research and analysis of the situation 5 SWOT Analysis of the Netflix, Inc.
5 Financial Statement Analysis of Netflix, Inc. 6 Financial Ratios of Netflix, Inc. 8
Formulation of the solutions 8 Discussion and selection of solutions 9 References 10
Appendices 11 Appendix A: Statement of Profit and Loss of Netflix, Inc. 11 Appendix B:
Statement of Financial Position of Netflix, Inc. 12
Case Introduction
Netflix, Inc. is an American overdone content platform and production firm
headquartered in California, USA. The company was established in the year 1997 by
Reed Hastings and Marc Randolph in the Scotts Valley, in California. The principal
operation of the firm is a subscription-grounded streaming facility presenting online
streaming by an extensive list of movies and TV series, together with those produced
internally.
As of July 2021, the platform possessed 209 million of subscribers, counting 72 million
subscribers inside the USA and Canada (Kastrenakes, 2021). The platform is
accessible globally apart from China (by reason of domestic limitations), Syria, North
Korea, and Crimea (because of the U.S. sanctions).
The firm possesses offices in numerous other countries, comprising Canada, Brazil,
France, the Netherlands, the UK, India, Japan, and South Korea (Netflix, Inc., 2021a).
The firm is an associate of the Motion Picture Association (MPA), making and allotting
content from states all over the world.
Figure 1: The Netflix, Inc. growth of subscribers in between Q2 2018 – Q4 2020
( Epstein, 2021 )
The Netflix, Inc.'s original corporate model encompassed DVD sales and rent through
mail; however, Hastings (the CEO) left the sales nearly after 12 months of the firm’s
creation in order to concentrate on the original DVD renting commerce (Pogue, 2017).
The company extended its business in the year 2007 through the presentation of
streaming media although keeping the DVD and Blu-ray renting commerce.
Moreover, the firm expanded globally in the year 2010 through streaming obtainable in
Canada, subsequently Latin America and the Caribbean. The company set foot in the
content production sector in the year 2013, introducing its opening series “House of
Cards” (Netflix, Inc., 2021a).
The media and entertainment sector (M&E) in the U.S.A. is an ample marketplace
having a worth of USD 703 billion. It makes up 1/3 of the worldwide media and
entertainment segment, which makes the U.S. the biggest M&E marketplace globally
(Nead, 2018). The M&E sector is formulated of more than a few diverse elements.
The five foremost elements are movie, TV, video games, music and publishing. Netflix,
Inc. falls under the movie and TV segments of this sector. Movie and TV solely make up
74 per cent of the overall M&E sector in the U.S.A. Even though the company may be
taken into account as a technology, media or entertainment firm, the CEO Hastings
stated that the company favors the entertainment sorting (Sherman, 2020).
As stated by the CEO, “media” has a tendency to contain advertising, and Netflix
doesn’t stream ads on its watching platform. In keeping with Sherman (2020), Netflix’s
valuing is substantially higher compared to the customary entertainment firms. This links
with their innovation and exceptional method to watching movies and TV. For the years,
the company has been the embodiment of the achievement in the streaming
marketplace.
As Warren Buffett excellently stated, “The volatility is away from synonymous with risk”.
Therefore, it could be apparent that individuals have to take into account debt, while
they dwell on how chancy any specified stock is, for the reason that too much debt is
able to sink a firm. Like lots of other firms, Netflix, Inc. also utilizes the debt.
Nonetheless, the actual question is if this debt is making the firm risky. An article by
Laughlin and Winkler (2019) is amid countless articles, which claim that the company’s
dependance on debt is challenging for its business. The critics frequently refer to the
debt, which the firm has gathered as a main reason the firm is not well-placed for
longstanding success.
It depends on credit markets as its capital decision for financing its operations, which is
a risky action and theoretically a negative stratagem. The content production is a cost
intensive operation; in order to produce additional content, the company will be obliged
to endure borrowing, digging itself deeper to a cash-restrained hovel.
And most people argue that, debt is just making worse the issue. This case study
scrutinizes Netflix, Inc. and its debt & equity situation, with the aim of understanding its
current circumstances, and ways to refine the company’s debt condition.
Identification of the challenge
The selection on capital structure possesses a foremost part in maximizing company
value and the performance of the business. This utilizes of a mixture of numerous bases
of funds that a company makes use of in order to fund its processes and for capital
reserves. These bases encompass the utilization of short-term and long-term debt;
preferred and common stock or equity financing (Jackson et al., 2013).
Every business does not utilize the unvarying capital structure; they vary in their
financial choices. It is a tough mission for companies to make decisions on the capital
structure where risks and costs are minimalized, profits are maximized and shareholder
wealth is increased.
The association of choices on capital structure with company performance were
suggested in extensive amount of literature, of which the most well-known ones are
Modigliani and Miller Theory (1958) and (1963), Agency Cost Theory (1976), Trade Off
Theory (1977) and so forth.
Debt and further obligations turn out to be risky for a firm once it is not able to
straightforwardly fulfill, either by free cash flow or through rising capital at a striking
price. Eventually, in case the firm is not able to realize its legal responsibilities to pay
back debt, stockholders might leave by nothing.
Nevertheless, an increasingly regular existence is where a firm has to issue stocks at
bargain-basement prices, lastingly reducing stockholders, only for propping up its
statement of financial position. Unquestionably, debt might be a significant tool in
companies, predominantly in capital hefty firms. The initial move while considering a
firm’s debt levels is to take into account its cash and debt in conjunction (Jackson et al.,
2013).
Netflix, Inc.’s starvation for outside financing is fabled: this streaming giant has turned
out to be one of the most valued American technology firms in stock markets through
leaning seriously on debt to back its everyday processes. At the close of the first quarter
of this year, the company possessed USD 15.6 billion of debt, increased from USD 14.7
billion from the year 2020. Nevertheless, as it holds a cash reserve of USD 8.40 billion,
its net debt is lower, at approximately USD 7.16 billion.
As seen from the most current statement of financial position (Q1 2021), the company
possessed current liabilities of USD 7.96 billion, and non-current liabilities of USD 19.3
billion (Netflix, Inc., 2021b). Counteracting this, it possessed USD 8.40 billion in cash
and USD 807 million in short-term accounts receivables. Thus, its liabilities overall USD
18 billion over the mixture of its cash and short-term receivables.
Considering that the company possesses an enormous market capitalization of USD
236.3 billion, it might be tough to think that these liabilities can place much risk.
Nonetheless, there are adequate amount of liabilities, which is definitely advised for
shareholders to remain monitoring the statement of financial position, going onward.
Main facts and events of the core study
Netflix, Inc.'s debt-to-equity ratio has been surging by the year 2015, which reached
1.96 at the end of the Q2 of the year 2021. If completed in a correct way, debt might be
a solid tool, and undertaking debt tactically, in the long term, is better for stockholders.
Netflix company selects to fund its commercial operations with more debt in order to
improve its cost of capital.
The content expenses make Netflix, Inc. an in-height capital expenditure business. As
the capital spending of any further sector, it serves like a barricade to entrance. Netflix,
Inc. expended USD 12.5 billion on content creation in the year 2020, and plans to raise
this number to USD 17 billion in the current year.
As the company anticipates the high capital requirements necessitated for enduring
development of its business, it must remain selecting financing consistent with its cost
of capital. And the firm has selected to fund its content investments through both
operating profits and the residual requests with the help of debt.
The company CEO openly specified that in improving its statement of financial position
(SOFP), the company tries for the capital structure, which leads to the lowermost
weighted average cost of capital (WACC). Considering the less interest rates, the tax
deductibility of debt and its low debt to company value, financing development over the
debt market is at present more effective compared to issuing equity (Sherman, 2020).
The business having high fixed costs guides us to the utmost significant fact: the moat
the company is in the middle of structuring. This is a routine, which is hard to leave off.
In case new content assists to increase subscribers, then understandably decreasing
expenditure, and content, risks decreasing them as well. Last year, the company had
negative free cash flow, which is anticipated to advance in this year, if company
decreases the external financing.
Research and analysis of the situation
SWOT Analysis of the Netflix, Inc.
Strengths: The company’s principal strength is its scope. On the whole, the size (i.e.,
the market share) synchronizes with income in a straight line. Through the previous
twenty years, Netflix, Inc. has expanded significantly. The other strength of the company
is its fame and brand recognition, as the company is a reliable streaming facility, which
has confirmed its value to the clienteles. In addition, the firm has been highly
competitive with its price-setting stratagem.
A reasonably priced once-a-month charge is one of the topmost primacies of clients and
Netflix delivers it. The firm’s introduction of original content is a significant strength as
well. The creation of unique content is particularly significant for the firm since it delivers
content, which cannot be misplaced. Another foremost strength company is having is
nonexistence of ads on its viewing platform, which makes the firm exclusive amid its
rivals.
Weaknesses: The chief weakness for Netflix, Inc. is the misplacement of content by
creators that enter to the streaming sector by themselves. Netflix had contracts with
firms, such as Disney and Warner Media for streaming rights to choose shows and
movies, however by the growing fame of the streaming, these firms and lots of others
have chosen to partake in the sector. In addition, Netflix possesses a huge quantity of
non-current debt that is a chief weakness for the firm.
Since the firm remains to increase debt to finance the creation of the content, it does not
seem that the firm will start returning its debt in near future. This might result in an
increase in subscription fees. Another key weakness that the firm has to take into
account is its reliance on the North American marketplace.
Opportunities: Netflix, Inc. holds the opportunity to stay being competitive with its pricing
approach. One prospect that the firm possess is rewarding current clients with a
promotional annual rate. The firm could possibly offer a yearly subscription against the
normal once-a-month subscription.
The other opportunity that the firm holds is the capability to create unique content for
certain areas. The firm has begun creating its own films and series, which presents
them the aptitude to produce content for certain target viewers for better matching the
requirements of its clients, without misplacing the content on its own platform.
Threats: It is unquestioned that, the main threat for the firm is the arrival of new sector
players. Netflix, Inc. was the primary streaming facility in the M&E sector, however, after
initiation their service line, the firm demonstrated that there is a request for streaming
inside the industry. As the rivals increases their market share, Netflix might not remain
on top.
As an instance, Disney introduced its individual streaming facility Disney+ in the year
2019. This platform solely is a foremost threat to Netflix, without even taking into
account all of the further platforms as HBO Max and Hulu. Additional threat is the
possibility of upsurge in subscription charges, which might increase Netflix’s affordable
subscription fees. In response, this might cause the company to lose clients, especially
price-sensitive of those.
As stated earlier, market saturation demonstrates being a huge threat to the company in
terms of North American market. The weight of succeeding and expanding to novel
region is especially problematic considering the government regulations (i.e.,
restrictions by Chinese government).
Financial Statement Analysis of Netflix, Inc.
The financial statements of the businesses deliver significant financial information on
many facets of the commercial establishments. Firms utilize their statements for
handling their commercial procedures and for delivering transparency to investors.
In order to present the financial facts, the comparison of the profit and loss statements
and statements of financial positions for the previous 5 years for Netflix, Inc. will take
place. These are able being utilized to assess the performance of a business and to
liken the percentage vicissitudes through the years.
Table 1: Comparison of the P&L Statement of Netflix in between 2016-2020
( Netflix Inc., 2021b )
Over the last 5 years, the company possessed an average upsurge in income of 22.86
per cent annually. Company’s 2020 close of year income was 2.83 times over than what
it was in the year 2016. In general, firm’s income has surged in every period (Appendix
A). Company possessed an average cost of income percent of 20.72%.
This for the year 2020 was 2.53 times more than the year 2016 cost of revenue. The
firm also possessed an average upsurge of 47.05% in net income. By the year 2016 to
the year 2017, its net income surged a noteworthy 54.66 %. Afterwards by the year
2017 to the year 2018, company had a record net income development of 66.01 %. In
general, firm’s net income last year was 14.79 times more than its 2016 levels.
Table 2: Comparison of the SOFP of Netflix in between 2016-2020 ( Netflix Inc.,
2021b )
For the total assets, the firm possessed an average yearly growth of 23.10%. the
company’s overall assets in last year accounted 2.89 times more than its overall assets
five years ago. The company’s cash and equivalents had a middling growth percentage
of 34.21%. These for last year was 5.59 times more than the year 2016.
Property and equipment have gradually grown as well, its growth rate being an average
of 28.09% annually. For over-all liabilities and shareholders’ equity, the firm possessed
an average yearly upsurge of 23.10%. As the overall assets, the liabilities and
shareholders’ equity last year were 2.89 times more compared to what it was five years
ago.
The company’s present content liabilities growth ratio has fell steadily through the five-
year period, middling just 4.52%. Accounts payable held a per year growth level of
15.72%. Accumulated expenditures had a comparatively consistent yearly growing rate
of 34.56% annually.
The form did not possess any short-term debt till the last year. The company’s overall
liabilities growing rate through the five-year period middled 20.70%. Overall liabilities
last year were 2.59 times more than the liabilities five years ago. Common stock has
held a middling growing rate of 17.45% through the last 5 periods.
Financial Ratios of Netflix, Inc.
Table 3: Comparison of the main financial ratios of Netflix in between 2016-2020
( Netflix Inc., 2021b )
Formulation of the solutions
Businesses are able to make moves in order to decrease and recover their debt-to-
capital ratio. Amid the approaches, which might be applied are upsurging lucrativeness
and reformation of the debt. The means utilized to lessen the ratio are better utilized
sequentially with one another and, in case the market timing is accurate, utilized in
unification with an increase in the pricing of their products and/or services.
Upsurged Income – The utmost reasonable move that Netflix, Inc. may make for
lessening its debt-to-capital ratio is upsurging the incomes and expectantly the profits.
This might be attained through raising the prices, surging sales, or lessening the
expenses. The additional cash collected could at that point be utilized to pay back the
prevailing debts.
Debt Reformation – Reforming debt delivers additional means in order to decrease the
debt-to-capital ratio of the firm. In case the firm is principally paying comparatively in-
height interest rates on its credits, and current interest rates are substantially lesser, the
firm might attempt to refund its present debt.
This would lessen both interest expenditures and once-a-month payments, refining the
firm's bottom-line profitability, cash flow and surging its stores of the capital. This is
known as a general and direct technique utilized to arrange improved terms for the firm
and its outlays.
Discussion and selection of solutions
As stated above, Netflix, Inc. is able to utilize specific tools, for instance, debt
reformation with the intention of lessening their debt-to-capital ratio. Through means of
specific bottom-line book-keeping methods, the Netflix, Inc might make itself seem in an
improved financial standing lacking the fear of bankruptcy. Interestingly, financial
pointers specify that the company is leveraging its capital effectively.
It has upsurged its return on invested capital by the year 2017. In comparison with
rivals, the company’s return-on-equity ratio (ROE) is performing healthy as well, a
pointer of a firm's long-term well-being and the efficiency of its present functioning
structure to create cash (Table 3).
In the beginning of the current year, Netflix Inc. stated that it anticipates to be cash-flow
neutral in current year and cash-flow positive every period after this year, and will no
longer necessitate outside financing for funding its processes, finishing a ten-year long
tendency and supporting stockholders that have tilled funds to the firm notwithstanding
its cash-burning means.
In addition, the company stated that it will take into account share buybacks, an
exercise it has not implemented by the year 2011 – the past time Netflix, Inc. had
positive cash flow.
The statement arose as share of the company’s earnings declaration, in which the firm
declared USD 1.19 earnings per share on incomes of USD 6.64 billion for the Q4, and
203.66 million worldwide subscribers, surged from 26 million at the close of the year
2011. Shares surged nearly 10 per cent on the news (Sherman, 2021).
The company’s market capitalization in January of the year 2011 was USD 11.5 billion,
which is in excess of USD 220 billion at the moment. The COVID-19 pandemic
lockdowns have substantially increased the company’s reappearance to positive cash
flow. Having production hindered amongst COVID-19 lockdowns and individuals being
stuck at home globally, the firm gained 36.57 million subscribers in the year 2020
though expending less funds on content compared to normal.
Currently, the firm plans to issue no less than a new film each week in the year 2021, in
addition to its regular agenda of television series, biographies, and specials. Netflix’s
content creation was not as influenced through the epidemic as that of further
Hollywood film studios that had to stop filming novel content for quite a few months, and
have just lately restarted with novel procedures in position.
Nevertheless, Netflix was capable of continuing the production of lots of new shows and
films globally in late spring last year (Epstein, 2021).
The unidentified query is how stockholders will react to the alteration in Netflix’s
narrative. Despite the fact functioning a maintainable commerce without the necessity of
external debt and share buybacks is “Business 101” action, the company’s stock has
increased as shareholders have gradually concluded that the firm would achieve well on
that potential.
As stated by Hastings, the company tries to be a much greater and much more lucrative
self-financing firm by time and dedicated to develop its cash flow outline expressively,
beginning in the current year 2021 and every period subsequently (Williams & Rasay,
2021).
The increasing rivalry from Disney, Apple, Warner Media and further sector players
might fester Netflix’s subscriber progress. Shareholders might reprove the company for
share buybacks rather than utilizing it for increased content.
In case the firm is selecting to utilize surplus cash for buybacks, it might happen for the
reason that Hastings and Sarandos think the firm’s position – and capacity to increase
fees in the forthcoming – is so solid that they might begin to changeover the firm to a
novel, increasingly settled stage without experiencing a successive loss in worth.
References
Denning, S. (2019). “Why Debt Isn't Killing Netflix Any Time Soon”. Forbes Magazine,
2019. Available from: https://www.forbes.com/sites/stephaniedenning/2019/05/26/why-
debt-isnt-killing-netflix/?sh=640ba4875407
Epstein, A. (2021). “Netflix says it has solved its skeptics’ biggest complaint”. Quartz
Media, Inc., 2021. Accessed 01 August 2021. Available
from: https://qz.com/1959586/netflix-says-it-doesnt-need-to-raise-debt-anymore/
Jackson, S. B., Keune, T. M. & Salzsieder, L. (2013). “Debt, equity, and capital
investment”. Journal of Accounting and Economics, Vol. 56, Issues 2-3, pp. 291-310.
Kastrenakes, J. (2021). “Netflix subscriber growth is stalling as it runs low on hits”. Vox
Media LLC. Accessed on 28 July 2021. Available
from: https://www.theverge.com/2021/4/20/22394425/netflix-subscriber-growth-stalls-
2021
Laughlin, L. S. & Winkler, E. (2019). “No Reason for Netflix Investors to Chill”. The Wall
Street Journal, 2019. Available from: https://www.wsj.com/articles/no-reason-for-netflix-
investors-to-chill-11557745201
Nead, N. (2018). “Media and Entertainment Industry Overview”. Accessed on 27 July
2021. Available from: https://investmentbank.com/media-and-entertainment-industry-
overview/
Netflix, Inc (2021a). “About Us”. Accessed on 27 July 2021. Available
from: https://about.netflix.com/en
Netflix, Inc. (2021b). “Annual Reports & Proxies”. Accessed on 28 July 2021. Available
from: https://ir.netflix.net/financials/annual-reports-and-proxies/default.aspx
Pogue, D. (2007). "A Stream of Movies, Sort of Free". The New York Times, 2007.
Available from: https://www.nytimes.com/2007/01/25/technology/25pogue.html
Sherman, A. (2020). “Netflix isn’t a media company or a technology company – it’s an
entertainment company, CEO Reed Hastings says”. CNBC, 2020. Available
from: https://www.cnbc.com/2020/09/09/reed-hastings-netflix-isnt-tech-or-media-its-
entertainment.html
Spangler, T. (2020). “Netflix Plans to Raise $1 Billion Through Debt
Offering”. Variety.com, 2020. Accessed on 28 July 2021. Available
from: https://variety.com/2020/digital/news/netflix-raise-1-billion-debt-offering-
|
||||||||||||||||||||||||||||||||
GET THIS PROJECT NOW BY CLICKING ON THIS LINK TO PLACE THE ORDERCLICK ON THE LINK HERE: https://www.perfectacademic.com/orders/ordernowAlso, you can place the order at www.collegepaper.us/orders/ordernow / www.phdwriters.us/orders/ordernow |
||||||||||||||||||||||||||||||||
|