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Finance

Name

Institution
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Finance

Introduction

Notably, it is essential to appraise the performance of a company to have an overall view

of both the worth as well as its market position. Imperatively, investors evaluate the performance

of a company to anticipate the share market performance (Abraham, 2013, 31). Moreover, they

also need to establish the extent to which they will be exposed to lose their money on

circumstance through which they invest their money. Investors should be able to investigate the

company's performance to ensure that they achieved their objectives (Gjerald, & Lyngstad, 2015,

13). Considerably, this paper examines both the weakness and strength of Facebook as well as

providing advisory information on whether it would be viable to purchase its shares or not. The

primary goal of this study is to give an approximation of the performance of the business as well

as evaluating whether it operates as required by performance standards that have been developed

in the marketplace.

Facebook was instituted in 2014 by Mark Zuckerberg, Chris R. Hughes, Dustin

Moskovitz and Eduardo Saverin as a social network that served students at Harvard University.

Facebook Inc. has it's headquartered in Menlo Park. Accordingly, these facilities were extended

to other 30 colleges who were operating within that locality after about four months after it was

initiated (Abraham, 2013, 36). They later opened it further to high school students in around

2005 and 2006 is when Facebook was open to every individual across the entire world. The

primary objective of instituting Facebook was to facilitate connectivity of several persons across

the entire world to share, communicate as well as discover each other through mobile accessories

and personal computers (Abraham, 2013, 39). Currently, Facebook is one of the companies
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which are empowering many individuals over the world to hook up faster effectively and

efficiently.

Facebook, Inc. is a deliberate website that provides social networking facilities; therefore,

opening up the world for individuals to remain connected (Abu-Khater et al., 2017, 214).

Furthermore, numerous persons in the entire world have opted to use Facebook in order to be

able to linked up with family as well as friends in order to remain inform to what is trending and

even used it to express and share valuable information that they consider vital for other to know

with regard to new development (Facebook Inc., 2017, n.p). Additionally, Facebook Inc.

provides a combination of distinct services ranging from social environment, importance, reach,

as well as an appointment to add the value of their advertisements. Some of the services that

Facebook Inc. offers comprise of the message, mobile apps, news feed, ticker, timeline, and lists.

Imperatively, Facebook has erected to ensure that developers, users, and marketers get

value for their money through facilitating developers to create as well as advanced these services

in the market (Abraham, 2013, 35). It is worth noting that Facebook Inc. has around 1.23 billion

users who are active. Moreover, the company considerably has created a new opportunity

through which marketers could reach potential market hence enlarging their segment (Abu-

Khater et al., 2017, 199). Several researchers have indicated that attracting fans through

Facebook remain probable techniques which are a valuable strategy with regards to marketing

communication (Facebook Inc., 2017, n.p). It is fundamental to state that Facebook has been able

to gradually increase their overall growth over the years hence revenues of the company has

significantly risen from USD 5.1 billion to around USD 7.9 billion. On the same note, Facebook

Inc. has been able to significantly lower it operation costs dedicated to sales with regards to

administration, general and selling costs down from 35.13 percent to around 22.59 percent.
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Therefore, it prompted the company to adopt a bottom line development from USD 53.0 million

to around USD 1.5 billion (Facebook Inc., 2017, n.p).

Companies present their financial reports to indicate to the shareholders and other

interested parties of the financial states of the company either monthly, quarterly, or yearly

(Facebook Inc., 2017, n.p). Moreover, it is mandatory for all companies to formulate a

comprehensive statement to show some revenues and profits that the company generates over a

given period. This financial report is often referred to a statement of earnings or profit and loss

statement (Gjerald, & Lyngstad, 2015, 16). The following is a comprehensive financial statement

of Facebook Inc. for the years 2012, 2013, 2014, 2015, 2016 and 2017.

FACEBOOK INC. INCOME STATEMENT

Fiscal year ends in December. USD in millions 2012- 2013- 2014- 2015- 2016-

except per share data. 12 12 12 12 12

Revenue 5089 7872 12466 17928 27638

Cost of revenue 1364 1875 2153 2867 3789

Gross profit 3725 5997 10313 15061 23849

Operating expenses

Research and development 1399 1415 2666 4816 5919

Sales, General and administrative 1788 1778 2653 4020 5503

Total operating expenses 3187 3193 5319 8836 11422

Operating income 538 2804 4994 6225 12427

Interest Expense 51 56 23 23 10

Other income (expense) 7 6 -61 -8 101

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Income before taxes 494 2754 4910 6194 12518

Provision for income taxes 441 1254 1970 2506 2301

Net income from continuing operations 53 1500 2940 3688 10217

Net income 53 1500 2940 3688 10217

Preferred dividend 21 9 15 19 29

Net income available to common shareholders 32 1491 2925 3669 10188

Earnings per share

Basic 0.02 0.62 1.12 1.31 3.56

Diluted 0.01 0.6 1.1 1.29 3.49

Weighted average shares outstanding

Basic 2006 2420 2614 2803 2863

Diluted 2166 2517 2664 2853 2925

EBITDA 1194 3821 6176 8162 14870

The company opts to communicate their financial status by providing a financial position

at the closure of the period (Abu-Khater et al., 2017, 208). Accordingly, the financial position of

Facebook is as shown above and therefore shareholders, as well as other interested parties, can

be able to analyze them so that they can make an informed decision on whether they are going to

invest their money in the company or not. In essence, financial position refers to wealth that the

shareholders own and owes the company (Facebook Inc., 2017, n.p). This includes some assets

that the business owes as well as other sources that the company could have applied in the

procurement of those assets which may comprise of shareholders' investment and bank loans
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(Facebook Inc., 2017, n.p). The following is the statement of financial position of Facebook Inc.

for the period ending 2014, 2015, and 2016.

FACEBOOK INC-A BALANCE SHEET

Fiscal year ends in December. USD in millions 2012- 2013- 2014- 2015- 2016-

except per share data. 12 12 12 12 12

Assets

Current assets

Cash

Cash and cash equivalents 2384 3323 4315 4907 8903

Short-term investments 7242 8126 6884 13527 20546

Total cash 9626 11449 11199 18434 29449

Receivables 719 1109 1678 2559 3993

Prepaid expenses 471 461 793 659 959

Other current assets 451 51

Total current assets 11267 13070 13670 21652 34401

Non-current assets

Property, plant, and equipment

Gross property, plant, and equipment 3273 4142 5784 7819 11803

Accumulated Depreciation -882 -1260 -1817 -2132 -3212

Net property, plant, and equipment 2391 2882 3967 5687 8591

Goodwill 587 839 17981 18026 18122

Intangible assets 801 883 3929 3246 2535

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Other long-term assets 57 221 637 796 1312

Total non-current assets 3836 4825 26514 27755 30560

Total assets 15103 17895 40184 49407 64961

Liabilities and stockholders' equity

Liabilities

Current liabilities

Short-term debt 201

Capital Leases 365 239 114 7

Accounts payable 65 87 176 196 302

Accrued liabilities 423 555 866 665 1961

Deferred revenues 30 38 66 56 90

Other current liabilities 169 181 202 800 522

Total current liabilities 1052 1100 1424 1925 2875

Non-current liabilities

Long-term debt 1500

Capital Leases 491 237 119 107

Deferred taxes liabilities 163

Other long-term liabilities 305 1088 2545 2994 2892

Total non-current liabilities 2296 1325 2664 3264 2892

Total liabilities 3348 2425 4088 5189 5767

Stockholders' equity

Additional paid-in capital 10094 12297 30225 34886 38227

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Retained earnings 1659 3159 6099 9787 21670

Accumulated other comprehensive income 2 14 -228 -455 -703

Total stockholders' equity 11755 15470 36096 44218 59194

Total liabilities and stockholders' equity 15103 17895 40184 49407 64961

The financial reports of Facebook Inc. that include balance sheet and the income

statement anticipated for the next two years are essential as indicated above. The amount of

revenue that Facebook Inc. is deemed to the net by the end of 2016 is $27.6 billion as well as

income that is approximately USD 7.87 billion in 2015 (Facebook Inc., 2017, n.p). It is

imperative to note that financial forecast is significantly fundamental for the management as well

as also risk analyst in the company (Robinson, 2015, 48). It aid management in shaping the

direction of their respective concerning the policies that the organization has instituted while also

offering critical financial information with concerns to the financial conditions of the company

(Facebook Inc., 2017, n.p). The statement of income provided above concerning the next two

fiscal periods with an assumption that there will be a 10 percent growth both for sales and Cost

of Goods sold. From the above statement, it can be deduced that the amount generated from sales

as well as the cost of sales about the financial period 2016 is USD 27638 (Facebook Inc., 2017,

n.p).

Ratio Analysis

Key Ratios Formula Rate

Liquidity

 Quick Ratio (Account Receivable + Cash + Current Marketable 10.2

securities) / (Current Liabilities)

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 Cash Ratio (Cash + Current marketable securities) / Current 10.2

Liabilities

Financial Leverage

 Debt-to-Equity Ratio Debt/ Owner’s Equity 0.005

 Debt Ratio Debt/ Assets 0.004

Asset Management

 Inventory Turnover Cost of sales/ Inventory 4.6

 Receivable Turnover Sales/ Account Receivable 6.2

Profitability

 Profit Margin Net Profit / Sales 0.4

 Return on Equity Net Income / Total Investment 0.2

Market Value

 P/E Ratio Net Income/number of unpaid shares 3.5

 Market-to-Book Ratio Price per share/ (Owners’ Equity/ number of 0.2

outstanding shares)

Calculation of ROE using DuPont system

DuPont System Equations Value

ROE Equity Multiplier*Asset Turnover * Net Profit 10.95

Net Profit ratio Net Income / Sales 18.94

Asset Turnover Sales /Assets 4.40

Equity Multiplier Total Assets / Total Equity 11.57

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The strength of the capital formation of the company can be ascertained through an examination

of the debt/equity ratio as well as long-term capital which is considered permanent in most of the

organization (Robinson, 2015, 43). Notably, investors can be able to apply the use of debt/equity

ratio to assess the financial solidity of the company.

Evaluating of ROA using Economic Value Analysis

Eva Equation = NOPAT - (WACC * TOC) Computation

T= 2,439

EBIT = 15,594

WACC 2.12%

NOPAT 13129

TOC (average) 61,885

EVA 118,067

Currently, the value of the Facebook stock is considerably much higher with a high price

per earnings. Therefore, it is vital to note that the value of the Facebook stock today presents the

potential that the company could be able to make drastic changes in the next five years from

now. This is because the company is significantly increasing its growth in both revenues as well

as operating leverage (Gjerald, & Lyngstad, 2015, 9). Essentially, investors who contemplate to

investing should consider the ordinary stock of Facebook Inc. given that it is a licensed company

trading with the higher price-to-earnings ratio. In some cases where the company indicates that

the price-to-earnings are imperatively higher than for other companies then investors should

abandon it and consider those who have already established a stable price-to-earnings ratio
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It is important to indicate that for a proper financial analysis to be instituted; it requires

consideration of other factors than just price-to-earnings ratio due to numerous uncertainties that

are presented by the environment (Robinson, 2015, 44). However, the management of Facebook

Inc. has been able to institute a robust image that has over the years enabled the company to

increase their sales performance across the entire world gradually. Also, Facebook Inc. business

model offers the shareholders a profitable opportunity that incorporates it remarkable

progression (Gjerald, & Lyngstad, 2015, 11). This shows that when purchasing Facebook Inc.

stock' investors ought to examine their value explicitly to establish the actual value that the stock

was trading during that particular period. Some of the indicators that investors should consider

while evaluating the company through which they intend to invest include price per earnings,

price-to-book, the rate of growth and price to sales ratio (Abraham, 2013, 35).

Conclusion

Through an examination of the financial information that is presented monthly, quarterly

or annually by the companies enable individual investors as well as shareholders to explicitly

make their decisions regarding the overall performance of the company in the market (Robinson,

2015, 42). Moreover, it aids investors to assess whether the company is complying with various

performance standards that have been established to facilitate the operations of the market.

Furthermore, determine the current state of the company also foster understanding of the average

amount that the company could be quantified hence making it easier to compare with the

prevailing market situation (Robinson, 2015, 47). It provides investors with an overview through

which their shares are contemplated to be trading for therefore investors could appreciate

whether they would risk their finances with the Facebook Inc. or not. Nonetheless, it is

imperative that a standard acceptable risk level should be defined with regards to the prevailing
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conditions that could lead to loosing entirely all the funds invested. Lastly, an individual ought to

be aware that the amount of money that they put in the purchase of stock in the company is not

always certain to get back their funds given that nobody knows what the future holds about value

of money.
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References

Abraham, S. (2013). Will business model innovation replace strategic analysis?. Strategy &

Leadership, 41(2), 31-38.

Abu-Khater, H., Metzar, N., Alotaibi, M., Boulos, Z., Lally, W., & Daim, T. (2017). Technology

Management: Case of Facebook. In Research and Development Management (pp. 199-

225). Springer International Publishing.

Facebook Inc. Cl A. (2017). Marketwatch.com. Retrieved 26 September 2017, from

http://www.marketwatch.com/investing/stock/fb/financials

Gerald, O., & Lyngstad, H. (2015). Service risk perceptions and risk management strategies in

business-to-business tourism partnerships. Tourism management perspectives, 13, 7-17.

Robinson, B. (2015). With a different Marx: Value and the contradictions of web 2.0

capitalism. The Information Society, 31(1), 44-51.