Thinking Of Buying Facebook?

By | June 3, 2020

Facebook is a publicly traded company that *I do not own*. Not because it’s a bad company or anything, just because it’s not one of my 10. I thought maybe today we would evaluate the financials of Facebook on MSN money.

MSN Money

Down in the Quote Search (see screen above), type FB because that is the ticker symbol for Facebook. Then you go here:

Facebook quote on MSN Money

Here you can see that the price of a share of Facebook stock is $231.91 and it is up 3.03% today. Now, let’s go to the FINANCIALS tab (right of SUMMARY).

Facebook financials

Here we can see the income statement chart for annual change. See INCOME STATEMENT on the left side of the screen and ANNUAL towards the right side (left of MARKETS). Between FINANCIALS and INCOME STATEMENT, there is a little information “FACEBOOK, INC. revenues grew 26.61% in FY 2019 as compared to FY 2018 to 70.70B. Net income fell 16.40% to 18.49B.” What this tells us first is that net income, or earnings, went down, so there is no earnings growth year over year. I would take this as a red flag that you would want to look further into.

Revenue, however, showed strong growth. So Facebook must have spent more on something. Put on your list to find out what that is. I will leave it to you to find out. 26.61% is a good amount of revenue growth so we could be looking at significant earnings growth in the near future.

Let’s look at the income statement to see if we can compute the same numbers. Scroll down just a bit.

Facebook income statement, 4 years

You can see that 2019 shows 70,697 and that 2018 shows 55,838 for revenue. That number is in millions, as you see in the grey section left of the years. So its 70.697 billion for 2019 and 55.838 billion for 2018. A lot of money, what does it mean to us? Nothing yet. Let’s do this:

Revenue growth = (2019 revenue – 2018 revenue) / 2018 revenue. That would be:

(70.697 – 55.838) / 55.838 = .2661 or 26.61%. So now you know how revenue growth was calculated.

Let’s take note of net income (scroll down) at 18.485B (B is for billion). Then let’s go to the balance sheet. You will have to scroll up a bit to find BALANCE SHEET. When you click on BALANCE SHEET, you will get this screen:

Facebook Balance Sheet Graph

That dark blue line is telling us something… it’s showing us that Facebook accumulated some debt in 2019.

Let’s scroll down a bit until you see the total current assets:

Total Current Assets – Facebook

Let’s take note that total current assets is 66.225B. Now let’s look at total current liabilities:

I highlighted the big gain in non-current liabilities, but the total current liabilities number is a little higher on the screen at 15.053B. Now the current ratio is:

Current Ratio = total current assets / total current liabilities OR

Current Ratio = 66.225 / 15.053 = 4.3994. A number higher than 1 is desirable for sure. A number above 4 means that the company may have too much cash and should put it to work.

During times of uncertainty, excess cash may be a good thing.

Now as far as that debt (highlighted in the last screen print)… we can see that Facebook took on an additional $10 billion in long term debt between 2018 and 2019. They obviously didn’t need to take on the debt. So why? I don’t have an answer for this but it could be a red flag; something you should try to get an answer for.

Another ratio that I like to look at is return on equity. We could generally calculate return on equity as:

ROEq = Net Income (earnings) / previous year equity. In our case that is:

ROEq = 18.485B / 84.127B = .219 or 21.9%. This gives us a good indication of equity growth or perhaps how much we should expect our shares of Facebook to grow over time.

However, the new profit or earnings from 2019 is unusually low and may be a one year occurrence. While this shows some risk, it also says that next year’s return on equity could be substantially higher.

You could also look at the price to earnings, which gives you a price-based measurement, but better would be a discounted present value of future earnings. What is difficult in this case… what will earnings be in future years?

This exercise was to show you the long way to compute some ratios and percentages. You can also find much of these answers at ANALYSIS:

It also tells you whether Analysts believe the company is a buy… I would still do your own analysis to determine what questions you may still have and get a good feel for the health of the company.

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