1 of 47

Analysis of financial ratios

​

PRESENTED BY: MOSTAFA ALAA, CINDY KOZA, GHANEM MAJZOUB, IOANA CIUTAC, IDRISSA TALL

2 of 47

INTRODUCTION

​

  • This analysis will determine if Facebook is a good company to invest in

​

  • The criteria used in our analysis is based on the financial ratios during two consecutive years (2019 & 2020)

​

  • We have also considered the competitive companies from within the same sector

​

​

​

3 of 47

TYPE OF FINANCIAL RATIOS

Profitability ratios

Liquidity ratios

Leverage ratios

4 of 47

FAANG COMPARISON

5 of 47

Profitability Ratios

EBITDA MARGIN, NET PROFIT MARGIN

ROA, ROE, GROSS MARGIN

and OPERATING MARGIN

6 of 47

WHAT IS EBITDA

EBITDA, which is short for earnings before interest, taxes, depreciation, and amortization, is a measure of a company's financial performance.

It can be used to compare companies against each other and against the industry average.

EBITDA is a non-GAAP measure as its calculations can vary between companies

7 of 47

WHAT IS EBITDA

EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

8 of 47

9 of 47

10 of 47

11 of 47

Findings

Netflix has the highest EBITDA margin among the FAANG companies and within its sector showing that it operates the most efficiently within the time period covered.

Despite that efficiency, it still generated less revenue than all the other companies.

12 of 47

WHAT IS NET PROFIT MARGIN

The net profit margin is a percentage of profit generated after accounting for all expenses, costs, and cash flow items.

It is used to assess if a firm is earning enough revenue from its sales.

It is a key indicator when evaluating a firm’s financial health but cannot be used alone as it doesn't take into account revenue growth or the management of production costs.

13 of 47

WHAT IS NET PROFIT MARGIN

14 of 47

15 of 47

16 of 47

17 of 47

Findings

​

  • Facebook has the highest net profit margin among the FAANG companies and is well above the mean value for its industry.
  • The firm generates the profit orders of magnitude above its peers.

18 of 47

Return on Assets (ROA)

  • Definition: ROA is the total returns (net income) divided by the total owned assets for a company. The higher ROA the better the company
  • Goal: Profitability is measured based on expenses and costs then analyzed compared to assets to see the effectiveness of a company according to deploying its assets to make profits.
  • Formula:

19 of 47

Return On Assets (ROA)

20 of 47

Facebook Compared to FAANG

21 of 47

Findings

In 2019, Facebook made the highest ROA compared to FAANG with about 20% which is about 2% higher than its higher competitor which is Apple.

2019

In 2020, Facebook’s position decreased to become the runner-up after Apple and the difference was really big, it is 5%.

2020

22 of 47

Return On Equity (ROE)

  • Definition: ROE is the total returns (net income) divided by the total shareholder’s equity and it may have an increase without additional equity investments.
  • Goal: It is very important (we can say main) ratio for shareholders as it tells them about the companies ability on gaining returns (more income) from their equity investments.
  • Formula:

23 of 47

Return On Equity (ROE)

24 of 47

Facebook Compared to FAANG

25 of 47

Findings

In 2019, Facebook’s position in FAANG according to ROE was the third (with 25% ratio)after Apple which came first with a very huge ratio about (60% ratio), then Netflix with (about 28% ratio).

2019

In 2020, Facebook’s position decreased to be the fourth with (20% ratio) and this is very strange because all FAANG’s ROE has increased such as Apple which became 90% (around)

2020

26 of 47

WHAT IS Gross Margin

Gross margin is the difference between net sales and total cost of goods sold

​

It provides a measure of profit before deducting operating costs

​

Gross margin is used to determine how efficient sales, products or services are at generating gross profit.

​

27 of 47

What is Gross Margin?

In absolute form:

​

Gross Margin = Net Sales - COGS

​

In percentage form:

​

Gross Margin = (Net Sales - COGS) x

100

————

Net Sales

28 of 47

29 of 47

Findings

  • A large increase in demand driven by COVID-19
  • Increased demand caused facebook’s advertising customers to demand lower prices
  • Diversified revenue

​

30 of 47

WHAT IS Operating Margin

Operating margin is a ratio between operating income and revenue

​

It provides a measure of profit while including operating costs

​

Operating margin is useful to determine if the company can pay costs such as, interest or taxes

​

31 of 47

WHAT IS Operating Margin

​

​

​

Operating Margin =

Operating income

—————————

Revenue

32 of 47

33 of 47

Factors affecting operating expenses:

  • Raw material price
  • Lawsuits
  • Investments
  • Capital expenditure (CAPEX)
  • Tax rates

​

34 of 47

Findings

2019

  • Semiconductor price index: 55.3
  • Legal costs: $10.5 billion
  • Investments:
    • CTRL labs: $0.5 - $1.0 billion
    • Playgiga: $70 million
    • Libra: Undisclosed
  • CAPEX: $15.65 billion
  • Effective tax rate: 25%

2020

  • Semiconductor price index: 54.8
  • Legal costs: $6.6 billion
  • Investments:
    • Jio platforms: $5.7 billion
    • Kustomer: $1.0 billion
    • Giphy: $400 million
  • CAPEX: $15.72 billion
  • Effective tax rate: 12%

35 of 47

Liquidity Ratios

CURRENT RATIO AND QUICK RATIO

36 of 47

WHAT ARE LIQUIDITY RATIOS

​

Liquidity ratios = financial ratios, that measure the company’s ability to meet its short-term obligations.

​

Most commonly used liquidity ratios:

​

current ratio => most well known

quick (or acid-test) ratio 

cash ratio

​

Current Ratio = Current Assets ÷ Current Liabilities

Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) ÷ Current Liabilities OR

= (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) ÷ Current Liabilities

Cash Ratio = (Cash Equivalents + Cash) ÷ Current Liabilities

37 of 47

CURRENT RATIO

Current Ratio = Current Assets ÷ Current Liabilities

​

If CR > 1 => CA > CL => Good sign ☺; the company is capable of paying off the debts

If CR < 1 => CA < CL => Not a good sign ☹; the company has difficulties in paying off the liabilities and the immediate debts

​

Current Ratio = CR Current Assets = CA Current Liabilities = CL

​

​

Facebook current ratio – 2016 -> 2020

​

​

38 of 47

Findings

​

Current ratio – is decreasing over the years, but with stable fluctuations. Consistent drops in current ratio indicates a possible pattern, so the investors can analyze, predict easily and buy stock.

​

Facebook current ratio – 2019 vs 2020

4.40 -> 5.05 (slight increase)

​

How Facebook makes money? By showing adds to ~3.3bn users and getting paid for it by advertisers (small businesses). Advertising represents 98% of its revenue.

​

Possible reasons?

Grow in assets, due to:

- advertising revenue has increased by 21% in 2020; growth was due to an increase in the number of ads served by Facebook by 33%

- Facebook's non-advertising revenue grew by 72% in 2020; growth was due to the sales of Oculus and Portal hardware

- COVID-19 pandemic attracted more users to Facebook, an increase of 12% in 2020, compared to 8% in 2019

- in US only, Facebook monthly users grew by 4% in 2020, compared to 2% in 2019

39 of 47

Findings

Facebook current ratio – vs Competitors

​

Facebook has the highest current ratio, for both years, 2019 & 2020, so a creditor, would consider a higher current ratio in favour of a lower current ratio, as it looks the company will meet it’s liabilities within the next 12 months. Low ratios (like Netflix in 2019 < 1), might raise a red flag for creditors, and might disqualify the company from obtaining loans.

​

​

40 of 47

QUICK RATIO

​

Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) ÷ Current Liabilities OR

= (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) ÷ Current Liabilities

​

Facebook quick ratio – 2016 -> 2020

​

​

​

​

​

41 of 47

Findings

​

Quick ratio – is decreasing over the years, but with stable fluctuations, and always much higher than 1 (‘healthy business‘).

​

Facebook quick ratio – 2019 vs 2020

4.28 -> 4.89 (slight increase)

Possible reasons?

- Current liabilities decreased in 2020, compared to 2019 = > Facebook has paid back more efficient it’s suppliers (EG: advertisers, small businesses)

- Total quick assets increased – due to an increase in:

- accounts receivable -> increase in the number of their active customers, during COVID-19 pandemic

- marketable securities -> increase in the FB Stock

- Increase in sales, on Facebook Marketplace platform; in 2020, 12% of Forrester survey responders (compared to 6% in 2019) – were buying products from Facebook Marketplace, which saw an increase in shipping options as well

- Increase in Marketing: FB Adds costs have increased in 2020 vs 2019

- The average FB CPC (cost-per-click) in 2019: $0.45

- The average FB CPC (cost-per-click) in 2020: $1.72

42 of 47

Findings

Facebook quick ratio – vs Competitors

​

Facebook has the highest quick ratio, for both years, 2019 & 2020.

The quick ratio helps investors and lenders to determine the ability of a company to meet its short-term obligations. Financial institutions analyze as well the quick ratio, when they have to decide whether to extend the credit or not. Investors will check the quick ratio and decide if they will invest capital, and how much they will invest.

​

​

43 of 47

Leverage ratios

DEBT RATIO AND DEBT TO EQUITY

44 of 47

WHAT IS A LEVERAGE RATIO

​

​

​

​

  • An organization's leverage ratio measures how much of its capital comes in the form of loans or their ability to meet their obligations.

​

  • An understanding of the amount of debt held by a company is helpful in deciding whether it can pay off its debts as they are due. Companies need a mixture of equity and debt to finance operations, and determining the amount of debt a company has can be helpful when assessing whether it can pay off its debt as it is due.

​

  • There are different types of leverage ratios but today I am going to discuss only two.

​

  • The Debt Ratio & Debt to Equity Ratio

​

​

​

45 of 47

Leverage Ratios

Debt Ratio

​

  • A debt ratio is defined as the ratio between total liabilities and total assets expressed as a decimal or percentage.

​

  • Debt ratio = Total Debt / Total Assets

Debt to Equity

​

  • A debt to equity is defined as the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

​

  • Debt to Equity = Total Debt / Total Equity

46 of 47

Findings

What the FB Leverage Ratio say?

​

​

​

​

Debt Ratio

​

  • The debt ratio in 2019 was 24% & in 2020 it was 19%.

​

  • Even though this may seem like it's a negative because of the decrease. But A lower debt ratio usually implies a more stable business with the potential of longevity because a company with lower ratio also has lower overall debt.

​

  • The Pandemic and Covid 19 can affect this. Since people had more time on their hands because of the lockdowns, they were more inclined to use social media and communicate.

Debt to Equity Ratio

​

  • The debt asset ratio in 2019 was 0% & in 2020 it was 8%.

​

  • In most cases an increase indicated positivity but that is not the case in the case. 

​

  • Since the debt-to-equity ratio in 2019 is 0% that means that Facebook had no debt in their Balance sheet.

​

  • With an 8% increase, however, things may have changed in 2020, indicating that Facebook may begin accumulating debt.

47 of 47

CONCLUSION

FACEBOOK vs AMAZON, APPLE, NETFLIX, GOOGLE

​

​

​

​

    • highest net profit margin, making it the most profitable amongst its competitors

​

    • highest current & quick ratios, which means the company has no issue in paying off it’s short-term obligations

​

    • lowest debt ratio, which means it is the most stable, with lower overall debt

​

    • The company recorded a 35% rise in revenue during the third quarter, it was boosted primarily by a 33% increase in advertising revenue, as its unique monthly active users on all platforms increased by 11% to 2.81 billion.

​

    • Based on the above reasons, we then concluded that Facebook is a better investment than the other companies.