Facebook Financial evaluation - Essay Example

It is today headquartered in Palo Alto, California. In the year 2011, Facebook recorded revenues of $1.5 billion and was considered the largest for a venture capital raised by private equities (Annual Report, 2012). This remarkable return was attributed to engaging in partnership, advertising and analytics business. In addition, the company had been experimenting video streaming rentals and daily coupons and deals that have also proved potential areas for growth. This essay evaluates Facebook financial statements by reviewing the following financial ratios: a) current ratio, b) inventory ratio, c) debt to equity ratio, d) net profit margin, e) return on equity, and f) price earnings ratio to determine its performance between year 2010 and 2012.

Current ratio This ratio determines firm’s ability to take care of short-term obligations. The higher the ratio, the more capable the company is to off-set its obligations and the lower the ratio the lower chances to meet short-term financial obligations (Brigham & Houston, 2001). Current ratio= current assets/ current liabilities Details 2012 2011 2010 Current Assets 11,267 4,604 2,762 Current Liabilities 1,052 899 978 Current Ratio 10.71 5.12 2.82 The ratio has been on the increase from year 2010 at 2.82 to 10.71 in year 2012.

This indicates that Facebook capacity to pay its short-term obligations has been on the rise (Eljelly, 2004). In addition, the company’s cash reserves have increased as well as its marketable securities. However, the current liabilities have increased at a reduced rate over the three years compared to increase in current assets. Inventory ratio This ratio indicates the number of times a firm’s inventory is sold and replaced over a given period. Low turnover shows poor sales, hence excess inventory whereas high ratio indicates effective buying or strong sales.

Inventory turnover= sales/ Inventory Details 2012 2011 2010 Revenues 5,089 3,711 1,974 Inventory 0 0 0 Inventory turnover ratio 0 0 0 In this case, the ratio is not applicable since the organization does not deal with physical stocks. Facebook engages in sale of services and hence stock does not form part of its financials. Debt to equity ratio This ratio measures Facebook financial leverage by dividing all the liabilities by stockholders equity. The ratio indicates the part of equity and debt the company has applied to finance its assets.

Debt/ Equity ratio= Total liabilities/ Shareholders Equity A high ratio indicates that a company finances its growth with excess debt capital, hence leading to volatile earnings due to high interest expense (Campbell, Hilscher & Szilagyi, 2008). Basically, if a company’s operations are financed mainly through debt capital, the company may generate more earnings meaning it will have enough resources to cover costs of debt and also a return for shareholders. In the table below, it is evident that Facebook has consistently maintained equal portions (29%) of both debt and shareholders’ equity to finance it assets.

Details 2012 2011 2010 Total Liabilities 3,348 1,432 1,002 Shareholders’ Equity 11,755 4,899 3,429 Debt/Equity Ratio 0.29 or 29% 0.29 or 29% 0.29 or 29% Net profit margin Net profit margin ratio shows the level of business profitability. It is computed using after-tax income that is then divided by revenue amount. Basically, the ratio indicates sales amount that is left after all expenses have been settled. Further, it