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How Financial Ratios conducted
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Ratio Analysis for Facebook
Introduction
The financial position of a company offers great insight on the performance of the company on short-term and long-term basis. This work argues that Facebook Inc. is a company with a subjective investment portfolio. The purpose of this paper is to use ratio analysis to determine the position of the Facebook as an investment destination. The first section explores two ratios and their implications to a potential investor. The second part evaluates whether Facebook is bankrupt. The succeeding section offers advice to potential investors. The work culminates by highlighting key points and making necessary recommendations.
Ratio Analysis
Information on the financial statement can offer an overview of a company’s performance over the past fiscal year. However, gaining crucial investment insights requires financial manipulation that yields financial ratios.
The first ration to consider is the Debt to Equity Ratio. The Debt to Equity ratio is DE ratio= (Total Debt)/(Shareholders^' Equity) (D’Amato, 2010). Facebook’s DE ratio is 4.4× (Bloomberg Businessweek [BB]. 2013). This shows that Facebook Inc. is heavily reliant on borrowing or debt rather than relying on shareholder capital when seeking asset and activity funds. However, Adelman and Marks (2010) argue that some industries require higher DE ration so that they can invest more heavily in fixed assets. This ratio shows that Facebook’s financial health is good when gauged against industrial average. Nevertheless, overreliance on fixed asset as the most outstanding investment portfolio for Facebook is misguided. Recent events that led to the 2007/ 2008 global financial crisis were attributed to overpriced fixed assets and unsecured subprime mort...
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...Lessons Learnt
I have leant that ratio analysis offers better insight of a company’s financial position on the short-term and long-term basis. However, I would recommend that investor advice should be based on ratio analysis that considers ratios from several years. This will ensure that the investor is making an informed decision based on the company’s financial ratio performance trend.
Works Cited
Adelman, P. J., & Marks, A. M. (2010). Entrepreneurial finance. (5 ed.). Bedford, Texas: Prentice Hall.
Bloomberg Businessweek [BB]. (2013). Facebook Inc. – A (FB: Consolidated issue listed on NASDAQ global select). Retrieved from http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=FB
D’Amato, E. (2010). Australian Shareholders’ Association: Standing Up for shareholders – The top 15 financial ratios. Australia: Lincoln Indicators Pty Ltd.
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Organizations use financial statements and ratio analysis assess financial performance viability. The ratio analysis are used to identify trends and to perform organizational comparison (financial) with other companies within same industry. Ratio analysis, using data reported on the financial statements, are divided into five major categories: common size, liquidity, solvency, efficiency, and profitability. This paper will assess the financial stability of John Hopkins Hospital (JHH) using the five ratio analysis.
Chowdhury, S., January 07, 2014. Market price-earnings ratio at three-year high, The Daily Star. [Online]: http://www.thedailystar.net/business/market-price-earnings-ratio-at-three-year-high-5714
Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.
Facebook, Inc.’s challenge is that they are too invested and dependent on their advertisement revenue. The company’s prime source of revenue comes from web and mobile advertisements and payment and fee from online gift purchases and virtual games (Stevens).
The most interesting financial factor is Facebook’s long-term debt. It was at an all-time high of 1,991 million in 2012 but reduced it down to 119 million in 2014, this is a change of -94%. Facebook has proven to manage its cost as well as show extremely high increases in profit and ROI. Financial statistics like those stated.
Monea, M. (2009). Financial ratios – Reveal how a business is doing? Annals of the University Of Petrosani Economics, 9(2), 137-144. Retrieved from http://www.upet.ro/eng
The article Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy was written in 1968 by Edward I. Altman. The purpose of the article is to address the quality of ratio analysis as an analytical technique. At the time, some academicians were moving away from ratio analysis and moving toward statistical analysis. The article attempted to determine if ratio analysis should be continued, eliminated and replaced by statistical analysis or serve together with statistical analysis as cofactors in financial analysis. The example case used in the article was the prediction of corporate bankruptcy.
It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.
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