Running header: EVALUATION 1

Evaluation of Corporate Performance for Facebook

Jean Johnson

BUS 401 Principles of Finance

Instructor: James York

January 25, 2015

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Evaluation of Corporate Performance for Facebook

By evaluating a company's performance will allow you to find the general perception in

the market and the worth of the company. When shareholders evaluate a company's performance

it's to find out how their shares will perform. When investors evaluate a company's performance

it's to find out if they should risk their money with this company. It is just important for a

business owner to evaluate the businesses performance to be able to meet their goals. In this

paper, I will analysis the strengths and weaknesses of Facebook and recommending or not

recommending purchase of the company stock. This tool is to estimate the performance in the

business and to find out if it is in accordance with performance standards established in market.

Facebook was founded by Mark Zuckerberg in 2004. It started being a social network for

Harvard University students. Only four months of starting this social network they included 30

other colleges to the network. By 2005, they opened Facebook to high school students. Then by

2006 it was available to everyone. Facebook was created to enable people to connect, share,

discover, and communicate with one another on personal computers and mobile devices. They

operate as a social networking company worldwide.

Market Watch states, " Facebook, Inc. is a social networking service and website. It aims

to make the world more open and connected. People use Facebook to stay connected with their

friends and family, to discover what is going on in the world around them, and to share and

express what matters to them to the people they care about.. The company offers advertisers a

unique combination of reach, relevance, social context, and engagement to enhance the value of

their ads. Its services include timeline, news feed, messages, lists, ticker and mobile apps.

Facebook was founded by Mark Elliot Zuckerberg, Dustin Moskovitz, Chris R. Hughes and
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Eduardo Saverin on February 4, 2004 and is headquartered in Menlo Park, CA." (Market Watch,

INC (2015).

The company focuses on creating value for users, marketers, and developers. They

support developers to build and grow. They have 1.23 billion active users. Facebook has open

new doors for marketers to reach out to more people. According to Elaine Wallace, Isabel Buil,

Leslie de Chernatony, and Michael Hogan state, "Attracting Facebook Fans potentially is a

valuable marketing-communications strategy (Hollis, 2011)." (Wallace, E., Buil, I., de

Chernatony, L., & Hogan, M. (2014). Bloomberg Business Week states, " Year over year,

Facebook, Inc. has been able to grow revenues from $5.1B USD to $7.9B USD. Most impressively,

the company has been able to reduce the percentage of sales devoted to selling, general and

administrative costs from 35.13% to 22.59%. This was a driver that led to a bottom line growth

from $53.0M USD to $1.5B USD." (Bloomberg Business week, (2015).

Our text states, "The income statement shows a company's revenues and profits over

some time period, usually a year or a quarter. It is also sometimes called the P&L (profit and

loss) statement or the statement of earnings." (Hickman, K. A., Byrd, J. W., & McPherson, M.

(2013, sec. 2.2). Below is the Income Statement for Facebook, Inc.

Annual Income Statement for Facebook, Inc.

Currency in Millions of US Dollars Dec 31 Dec 31 Dec 31 Dec 31

as of 2011 2012 2013 2014

Total Revenue 3.71B 5.09B 7.87B 8.66 B

Cost of Goods Sold 860.0 1,364.0 1,758.0 1,934.0

Gross Profit 2,851.0 3,725.0 6,114.0 6,725.0

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Selling General & Admin Expenses, 707.0 1,788.0 1,778.0 1,956.0

Total

R&D Expenses 388.0 1,399.0 1,415.0 1,557.0

Interest Expenses -42.0 -51.0 -56.0 -62.0

Interest and Investment Income 4.0 14.0 19.0 21.0

EBT, Including Unusual Items 1,695.0 494.0 2,754.0 3,029.0

Income Tax Expense 695.0 441.0 1,254.0 1,379.0

Earnings from Continuing Operations 1,000.0 53.0 1,500.0 1,650.0

Net Income 1,000.0 53.0 1,500.0 1,650.0

Net Income to Common Including

Extra Items 668.0 32.0 1,491.0 1,640.0

Our text states, " The balance sheet (also called the statement of financial position) shows

a company's financial position at a point in time: for example, as of December 31, 2013, or at the

end of a business quarter. We have mentioned "financial position" several times. By financial

position, we mean what the company owns and owes; that is, the assets the company owns and

the various sources of financing it has used to acquire those assets, such as loans from banks and

the investment of shareholders." (Hickman, K. A., Byrd, J. W., & McPherson, M. (2013, sec.

2.2). Below is the Balance Sheet for Facebook, Inc.

Annual Balance Sheet for Facebook, Inc.

Currency in Millions of US Dollars as Dec 31 Dec 31 Dec 31 Dec 31

of 2011 2012 2013 2014

Assets
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Cash and Equivalents 1,512.0 2,384.0 3,323.0 3655.0

Total Cash and Short Term Investments 3,908.0 9,626.0 11,449.0 12,594.0

Other Receivables -- 451.0 51.0 56.0

Total Receivables 547.0 1,170.0 1,160.0 1,276.0

Prepaid Expenses 149.0 471.0 461.0 507.0

Total Current Assets 4604.0 11,267.0 13,070.0 14,377.0

Gross Property Plant and Equipment 1,925.0 3,273.0 4,142.0 4,556.0

Accumulated Depreciation -450.0 -882.0 -1,260.0 -1,386.0

Net Property Plant and Equipment 1,475.0 2,391.0 2,882.0 3,170.0

Goodwill 82.0 587.0 839.0 923.0

Deferred Charges, Long Term -- -- -- --

Other Long Term Assets 90.0 57.0 221.0 243.0

Total Assets 6,331.0 15,103.0 17,895.0 19,685.0

Liabilities & Equity

Accrued Expenses 57.0 146.0 196.0 216.0

Current Portion of Capital Lease Obligations 279.0 365.0 239.0 263.0

Other Current Liabilities, Total 425.0 468.0 565.0 622.0

Unearned Revenue, Current 75.0 8.0 13.0 14.0

Total Current Liabilities 899.0 1,052.0 1,100.0 1,210.0

Long-Term Debt -- 1,504.0 -- --

Capital Leases 398.0 491.0 237.0 261.0

Other Non-Current Liabilities 135.0 301.0 1,088.0 1,197.0

Preferred Stock Convertible 615.0 -- -- --

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Total Preferred Equity 615.0 -- -- --

Additional Paid in Capital 2,684.0 10,094.0 12,297.0 13,527.0

Retained Earnings 1,606.0 1,659.0 3,159.0 3475.0

Total Common Equity 4,284.0 11,755.0 15,470.0 17,017.0

Total Equity 4,899.0 11,755.0 15,470.0 17,017.0

Total Liabilities and Equity 6,331.0 15,103.0 17,895.0 19,685.0

Facebook, Inc. Pro Forma financial statements (Income Statements and Balance Sheets)

for the next two fiscal years are shown above. Facebook, Inc. is expected to generate revenue of

about $5.09 billion by the end of 2012 and revenue of about $7.87 billion by the end of fiscal

2013. According to our text, " Pro forma financial statements (or projected finance statements)

are powerful tools for the financial manager or analyst. They help the financial manager forecast

how changes in policies will affect the company's financial situation." (Hickman, K. A., Byrd, J.

W., & McPherson, M. (2013, sec. 3.1). Pro Forma financial statements (Balance Sheet and

Income Statement) for the next fiscal year, assuming a 10 percent growth rate in sales and Cost

of Goods Sold (COGS) for the next year. As shown above, with a 10% growth in Sales and Cost

of Goods Sold (COGS) for the fiscal year 2014 is 1,934.0.

Complete ratio analysis for the last fiscal year using at least two ratios from each of the

following categories: Liquidity, Financial leverage, Asset management, Profitability, and Market

value.

Financial Ratios Equation Value

Liquidity

Current Ratio (Current Assets) / (Current Liabilities) 11.88

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Quick Ratio (Current Assets - Inventory) / (Current Liabilities) 11.88

Financial Leverage

Debt to Equity (Total Liabilities) / (Shareholders' Equity) 3.08

Debt Ratio (Total Liabilities) / (Total Assets) 13.55

Asset Management

Inventory Turnover (Cost of Goods Sold) / (Inventories) 6.76

Total Assets Turnover (Sales) / (Total Assets) 0.48

Profitability

Return on Equity (Net Income) / (Shareholders' Equity) 10.95

Return on Assets (Net Income) / (Total Assets) 9.04

Market Value

Price to Earnings (P/E) (Market Price of Common Stock) / (Earnings per Share) 74.32

Earnings Per Share (Net Earnings) / (Outstanding Shares) 92.47

A calculation of Return on Equity (ROE) using the DuPont system.

DuPont Analysis Equations Equations Results

ROE (Net Income) / (Equity) 10.95

Net Profit Margin (Net Income) / (Revenue) 18.94

Asset Turnover (Revenue) /(Assets) 4.40

Equity Multiplier (Assets) /(Equity) 11.57

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A company's capitalization describes its composition of permanent or long-term capital,

which consists of a combination of debt and equity. A company's reasonable, proportional use of

debt and equity to support its assets is a key indicator of balance sheet strength (Investopedia,

2013). Assessment of management performance by calculating Economic Value Added (EVA).

Eva Equation Eva = NOPAT - (WACC * TOC)

NOPAT = Net Operating Profit After Tax = EBIT * (1-T)

TOC (average) = Average Total Operating Cost = Total Assets - (Total

Current Liabilities - Short-term Debts)

T= Tax 45.53

EBIT = Earnings Before Interest and Tax 2,754,000

WACC Weight Average Cost of Capital 1.74%

NOPAT = 2,804,000

TOC (average) = 16.8B

EVA 2,803,970.77

A synopsis of your findings, including your recommendations and rationale for whether

or not to purchase stock from this company. Facebook, Inc. stock is expensive and has a high P/E

ratio. If you look at Facebook, Inc valuation today and look where the annual earnings could be

in about five years may help you to decide to purchase stock from this company. Facebook, Inc.

has a combining rapid revenue growth and operating leverage. It is important for investors

wishing to invest on common stocks of a publicly-traded company you look at the company's
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price to earnings ratio. For example, if a high price to earnings ratio shows investors are

expecting higher earnings growth compared to companies with lower price to earnings ratio.

You just can't rely on the company's price to earnings ratio because it does not tell the

whole story by itself. When it comes to future looking projections the investor should take it with

a grain of salt. There are too many uncertainties to future looking projections. What does matter

is the fact that Facebook, Inc. profitable business model combined with its impressive growth.

This still does not mean to buy Facebook, Inc. stock. When buying stock from a company like

Facebook, Inc. investors should be careful because of the stocks priced as enthusiastically as

Facebook, Inc.

There are several questions you should ask yourself before investing into company like

Facebook, Inc. What market capitalization will Facebook come public at? What are the key

pricing metrics? P/E, growth rate, price to book, price to sales? What are Facebook's future

growth rate? At 800 million user, where do they begin to plateau? Top out? After looking at all

the facts about the financial position of Facebook, Inc., I would recommend purchasing

Facebook, Inc. stock. They are a company that has over a billion customers and mobile users.

Their balance sheet is quite solid with short-term cash investments growing, shareholder equity

growing, and no long-term debt. Their revenue and earnings have been growing as well. Their

profit margins are up and free cash flow tops $3 billion.

In conclusion, . This tool is to estimate the performance in the business and to find out if

it is in accordance with performance standards established in market. By evaluating a company

allows you to what the company is worth and the general perception in the market. This shows

the investor how their shares will perform and if they should risk their money with that company.

You need to know what level of risk you are willing to take before investing into a company.
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You need to understand that there is no guarantee on your return because you cannot tell what

the future is going to hold and too much uncertainty.

References:

Bloomberg Business week, (2015). Financial Statements for Facebook Inc-A (FB). Retrieved

from http://www.bloomberg.com/research/stocks/financials/financials.asp?ticker=FB

Investopedia (2013). Complete Guide to Corporate Finance. Retrieved from:

http://www.investopedia.com/walkthrough/corporate-finance/5/capital-structure/capital-

structure.aspx

Hickman, K. A., Byrd, J. W., & McPherson, M. (2013). Essentials of finance. San Diego, CA:

Bridgepoint Education Inc.

Market Watch, INC (2015). Annual Financials for Facebook Inc. CI A. Retrieved from

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

Wallace, E., Buil, I., de Chernatony, L., & Hogan, M. (2014). Who "Likes" You... and Why? A

Typology of Facebook Fans. Journal Of Advertising Research,54(1), 92-109.

doi:10.2501/JAR-1-092-109