I have attached Part 1 of the project for reference. Additionally I have attached The Assignment Description and the Rubric for Grading. The same company from Part 1 will be used for this part
FINC 330 Project Part 1 Subject Company – Facebook (Ticker – FB) Facebook is a social media company, located in the United States. It has recently acquired social media platforms like WhatsApp and Facebook majorly earns their revenues from the advertisement that they show on their platforms and charge the advertisers for the same. Facebook has daily active users of 1.52 billion. Apart from the advertisement revenue Facebook also makes money from the. Key competitors of the Facebook are Twitter, WeChat, LinkedIn, Google, and Snap chat. For our analysis, we have chosen Twitter. Apart from the advertisement revenue, Facebook also has payment services on WhatsApp, they are developing the cryptocurrency too. Industry Analysis – Social media industry majorly earns from the advertisement revenue that they sell on their platforms. Due to the digital boom, social media companies have witnessed a great pace and the number of the active users have increases drastically. The industry has been fragmented and different platforms have more or less focused on their core competencies and competitive advantage to keep up with the fast paced industry. Common size Analysis – For the common size analysis of the balance sheet, we have considered the assets as the base and presented the other line items as the percentage of it. Facebook 2018 2017 2016 2015 2014 Cash and Short Term Investments 42% 49% 45% 37% 28% Total Current Assets 52% 57% 53% 44% 34% Property/Plant/Equipment, Total - Net 25% 16% 13% 12% 10% Goodwill, Net 19% 22% 28% 36% 45% Total Current Liabilities 7% 4% 4% 4% 4% Common Stock, Total 44% 48% 59% 71% 76% Total Equity 86% 88% 91% 89% 90% As we can see from the table and graph, over the last 5 years, the cash and the short term investments which have increased significantly. However, due to the recent acquisitions, the cash position as a proportion of the total assets have decreased in the last few years. Common stock as the proportion of the total assets have decreased significantly which suggests that the firm has not issued new stock in the recent years and they have been using the cash to grow the business. Total equity as the proportion of the total assets have remained more or less constant which means the firm has been generating enough earnings and the business has been very profitable. As compared to twitter, the cash and the short term investments are comparable. However, if we compare the equity position of the twitter with the Facebook, we can see that the Twitter has been lagging since they have raised enough debt on their balance sheet. However, Facebook has not raised any debt due to their healthy cash position. Twitter 2018 Cash and Short Term Investments 61% Total Current Assets 70% Property/Plant/Equipment, Total - Net 9% Goodwill, Net 12% Total Current Liabilities 15% Common Stock, Total 0% Total Equity 67% Facebook Trend Analysis – As we can see from the table, the assets grew at a rate of CAGR of 25%. Whereas the highest growth was seen in the net income which shows that the economies of the scale has been achieved due to higher revenue and the fixed costs getting distributed across a larger user base increasing the profitability of the firm significantly. Cost of revenue is in line with the revenue and almost grew at the same growth rate. This subsequently leads to same growth rate for the gross profit as well. Facebook has not raised any debt and due to this reason firm has 0 interest expense and hence, they have a very good growth prospects due to possibility of growing through the medium of debt. Facebook 2018 2017 2016 2015 2014 CAGR Revenue 55,838 40,653 27,638 17,928 12,466 45% Cost of Revenue, Total 9,355 5,454 3,789 2,867 2,153 44% Gross Profit 46,483 35,199 23,849 15,061 10,313 46% Net Income 22,112 15,934 10,217 3,688 2,940 66% Cash and Short Term Investments 41,114 41,711 29,449 18,434 11,199 38% Total Assets 97,334 84,524 64,961 49,407 39,966 25% Due to recent acquisitions, the cash position of the firm has been deteriorated a bit as compared to the previous years, however they have witnessed a growth rate of 38% compounded annually over last 5 years. Ratio Analysis – Liquidity ratios- Quick Ratio = (Cash + Marketable Securities + Account Receivables) / Current Liabilities Current ratio = (Cash + Marketable Securities + Account Receivables + Inventories) / Current Liabilities Industry Median 2018 2017 2016 2015 2014 Quick Ratio 3.29 6.81 11.01 10.89 10.09 8.70 Current Ratio 2.99 7.19 12.92 11.97 11.25 9.40 Source- Thomson Reuters As we can see as compared to the industry, the current and the quick ratio has been significantly higher. It has been growing over the period of the time, however it has seen a dip in the recent years. Liquidity in the firm – As far as the liquidity is concerned the firm has been able to maintain a very robust position in the liquidity front due to very high amount of cash and liquid assets as compared to the liabilities. As already discussed the firm has not raised any debt and because of this, the liquidity crunch is not significant. As seen in the common size analysis, the firm has Operating Ratios – Days Inventory in Hand = 365 * Average Inventory / COGS Days of Sales Outstanding = 365 * Average Account Receivables / Credit Sales Days of Payables Outstanding = 365 * Average Account Payables / Credit Purchases Cash Conversion cycle = Days Inventory in Hand + Days of Sales Outstanding - Days of Payables Outstanding Facebook Industry Median 2018 2017 2016 2015 2014 Asset Turnover 0.65 0.61 0.54 0.48 0.4 0.43 Cash Cycle (Days) (12.9) 2.3 -1.1 -4.7 -7.2 -14 Avg. A/R Days 51.6 44 44.2 43.4 43.2 40.9 Avg. Inventory Days 6.7 - - - - - Avg. A/P Days 106.9 41.7 45.4 48.1 50.5 54.9 Fixed Asset Turnover 9.87 2.91 3.64 3.87 3.71 3.64 Source- Thomson Reuters As compared to the industry, the firm’s asset turnover ratio is marginally low, however it is improving over the years and it is a good sign. Also the vendor relations are pretty good due to very favourable terms and very less Average Account payable days. Also, the cash cycle is positive as compared to the negative for the industry which could be largely driven by the account payables days. Also, the efficiency wise for the fixed assets Facebook is lagging. Profitability Ratios- Net Profit Margin = Net Income / Net Revenue (Revenue – Excise duty) Operating Margin = EBIT / Net Revenue (Revenue – Excise duty) EBITDA Margin = EBITDA / Net Revenue (Revenue – Excise duty) Industry Median 2018 2017 2016 2015 2014 Gross Margin 78.3% 83.2% 86.6% 86.3% 84.0% 82.7% EBITDA Margin 13.2% 52.4% 57.1% 53.4% 45.6% 50.0% Operating Margin 6.5% 44.6% 49.7% 45.0% 34.7% 40.1% Pretax Margin 5.9% 45.4% 50.7% 45.3% 34.5% 39.4% Net Margin 6.9% 39.6% 44.8% 37.0% 20.6% 23.6% Source – Thomson Reuters As compared to the industry, Facebook has been able to maintain significantly higher profit margins and this has been increasing year over year. We believe that this trend will continue and we will see the profitability moving up with the increasing user base. Return on Investment Ratios - Return on Equity = Net Income / Shareholder’s Equity Return on Assets = Net Income / Total Assets Facebook Industry Median 2018 2017 2016 2015 2014 ROE 8.8% 27.9% 27.3% 19.8% 9.2% 11.4% Pretax ROA 4.1% 27.9% 27.6% 21.9% 13.9% 17.0% Source – Thomson Reuters As we can see as compared to the industry the firm has been able to manage subsequently higher profits for the given assets and equity which is a very good sign. Management needs to focus more on the efficiency of the assets and how it can be utilized to further boost the profits. From the profitability perspective the Facebook has been doing exceptionally well. Return On Equity – For the DuPont analysis it can be broken down into three parts- Net Profit Margin The net profit margin is the ratio of bottom line profits compared to total revenue or total sales. This is one of the most basic measures of profitability. Asset Turnover Ratio The asset turnover ratio measures how efficiently a company uses its assets to generate revenue. Financial Leverage Financial leverage, or the equity multiplier, is an indirect analysis of a company's use of debt to finance its assets. DuPont/Earning Power Industry Median 2018 2017 2016 2015 2014 Asset Turnover 0.65 0.61 0.54 0.48 0.40 0.43 x Pretax Margin 5.9% 45.4% 50.7% 45.3% 34.5% 39.4% Pretax ROA 4.1% 27.9% 27.6% 21.9% 13.9% 17.0% x Leverage (Assets/Equity) 1.46 1.16 1.14 1.10 1.12 1.11 Pretax ROE 8.1% 32.0% 30.8% 24.2% 15.4% 19.0% x Tax Complement 0.97 0.87 0.77 0.82 0.60 0.60 ROE 8.8% 27.9% 27.3% 19.8% 9.2% 11.4% The ROE of Facebook has increased significantly and the major driver behind this is the increase in the profit margin and the asset turnover ratio. Leverage multiplier has been more or less remained same however we have seen significant rise in the profit margins and the efficiency ratios. If we compare the same ratios for the competitor Twitter, the profitability ratios are significantly lesser even though the firm has been using the debt and the equity multiplier is very high. Since the asset efficiency is same for both the firms, the twitter net profit margin is low which is driving down the ROE. Twitter Industry Median 2018 Asset Turnover 0.65 0.35 x Pretax Margin 5.9% 13.9% Pretax ROA 4.1% 4.8% x Leverage (Assets/Equity) 1.46 1.49 Pretax ROE 8.1% 7.1% x Tax Complement 0.97 2.85 ROE 8.8% 20.3% As far as the management is concerned the firm has been going in the right direction and need not do anything. The firm can use more leverage to grow and that will enhance the ROE but this could be the corporate strategy that the Facebook has been following. Recommendation – Buy We see that the firm is set to