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Introduction
The methods of analyzing the investment attractiveness of companies have been influenced by factors such as the specifics of the companies activities, a small material component, and high profitability. The rise in the value of Facebooks securities is due more to investors optimism than the development of the main lines of business. The criteria for assessing a companys financial position are its liquidity and solvency. The ability to timely and in full make settlements on short-term obligations is considered profitable.
Discussion
Profit has become increasingly important for public sector organizations due to new public management reforms. The liquidity of credit is its ability to be transformed into cash, and the degree of liquidity is determined by the length of the period during which this transformation can be carried out (Laguecir et al., 2019, p. 3). When calculating financial analysis, one of the main questions remains: How can the company decide the amount to spend that will get the maximum return, and what is the breaking point of investing when the return starts to decline?
Specific indicators can be calculated based on the preceding information provided in the form 10k report. Thus, the companys working capital for 2011 was 3.705 million dollars, and liabilities amounted to 1.432 million, that is, 38.6% (Facebook, 2014). The company had enough capital to pay off its obligations for this year. In 2012, the companys capital increased significantly by 175.7%, amounting to $10.215 million. These indicators indicate the growth of the companys profit and that investors are interested in it. At the same time, payments on obligations exceeded last year and increased by 133.7%, amounting to $3.348 million (Facebook, 2014).
Again, one can observe a significant excess of capital and the ability to pay off obligations since they represent 32.7% of the total capital. In 2013, working capital increased slightly compared to the previous year and amounted to $11.970 million (Facebook, 2014). Such slight growth can be justified by the fact that the company has begun the process of stabilization and strengthening its position in the market. Liabilities, however, fell substantially from levels between 2011 and 2012 to $2.425 million.
Financial Statement Ratios
The short-term liquidity ratio, as measured by the quick ratio, shows the ability of the firm to pay off its short-term financial obligations using the available current assets. In addition, the profitability ratios indicate how profitable the company traded during the three years (Angelovska, 2022, p. 57). The market efficiency ratios reflect the strength of shares and the values of market prices of the company shares. Capital structures and long-term solvency show how strong the company assets can be used to facilitate its operations when required. Therefore, these ratios have been presented in the table below. The formula for each ratio is also given to indicate the calculations required.
Reasons for And Against Investing in Facebooks Common Stock
In the short-term financial projections of the fakebook growth plans, there is an excellent opportunity to earn on the growth of the companys assets as expressed in the financial ratios computed. The outlook for Facebook is positive due to the market value of the share prices Facebook shares in the long term. However, considering the cons and risks of such investments in Facebook shares is also worth considering. Despite the impressive growth in revenue during the three years, the companys free cash flow and dividend yield did not increase much.
In addition, since investors are primarily concerned with earnings per share and the ratio of share to earnings, it is possible to lose sight of capital expenditures, which show where the company is being developed. Facebook shares are trading at a significant premium in an already overheated market, and companies will have to increase spending to sustain further growth. Facebooks average P/E ratio for the current year is 1.00. This is another reason the companys free cash flow remains low compared to the booming revenue.
Conclusion
In conclusion, Facebook is spending more and more to meet investors revenue expectations. Facebooks business is based on advertising, and the behavior of this industry in a crisis is very unpredictable. When the development of the primary social network platform reaches the ceiling, the company will be forced to look for ways to increase the audience of users and monetize through new controlled services. Therefore, it is recommended that before one invests in Facebook shares, a deep analysis is conducted to determine the value of each share price and the return from such investments. Investing in the company shares is inappropriate based on the prevailing financial ratios presented in 2013, 2012, and 2011.
References
Angelovska, N. (2022). Return on investment on Facebook ads: Quantitative research. UTMS Journal of Economics, 13(1), 56-66. Web.
Facebook, Inc. (2014). Form 10-K. U.S. Securities and Exchange Commission. Web.
Laguecir, A., Chapman, C. S., & Kern, A. (2019). Profitability calculations under the trial of strength: insights into intra-accounting variation in a social housing organization. Accounting, Auditing & Accountability Journal. 33(4), 727751.
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