Today, i am going to be teaching people how to read a company balance sheet. This will enable you to read and understand the underlying investment that you are buying and whether it is profitable or not.
We shall be going through Facebook's balance sheet for the purpose of this article. This is a copy of Facebook's annual 2016 financial statement.
https://s21.q4cdn.com/399680738/files/doc_financials/annual_reports/FB_AR_2016_FINAL.pdf
Please note keywords are in bold.
Looking at Facebook's Revenue. We can clearly see their has been annual increases in the revenue the company makes. 2012: 5,089Million, 2013: 7,872 Million, 2014: 12,466 Million 2015: 17,928 Million, 2016: 27,638 Million. This is quite a positive development and the type of growth in revenues you'd like to see within a company.
Over the same period the company has increased it's Net income. A company's net income is the company's profit and is calculated by revenue - expenses. which is the amount of money that the company makes over a given period. 2012: 53 million, 2013: 1,500 million, 2014: 2,940 million 2015: 3,688 million and 2016: 10,217.
Upon the same page you can see also diluted and basic earnings per shares. The two figures are different to one another that is because one includes and one excludes convertible securities such as stock options, secondary market purchases that can become basic common shares within a company.. Companies that have a high diluted EPS typically cause the value of your underlining purchase to become "worth-less" due to inflationary stock policies. because of more stocks being in circulation. Do read up more upon stock dilution for a better understanding.
The Net-worth of Facebook is 59,194 million in 2016 up from 44,218 million. To calculate the Net-worth of a just do Assets - Liabilities.
Total Assets - 64,961 million in 2016 up from 49,407 million a year prior.
Total Liabilities - 5,767 million up from 5,189 the year prior. Dating back to 2012 every year with the exception of 1 year, which was 2013 had seen the company's liability increase the year before. This can be a worrying trend going forward and something investors should keep an eye upon to make sure the company isn't getting into excessive debt even with a huge cash pile like Facebook.
Book Value - Facebook's Net book value is around 38,537 million. Please be aware that using the book value metric is not a reliable metric for assessing technology companies underlying value and other similar countries reliant upon tech, good will etc. To help calculate a company's underlying book value you need to assess the total assets minus good will and intangible assets minus liabilities.
Current Ratio - The current ratio is essentially a metric used to assess a companies ability to service it's long term and short term debt obligations. A company with a higher number than 1 shows that they are able to cover these obligation if the need ever arises. However, a number lowe than one suggests that it's liabilities is eating away at the profitability of the company. Facebook has a ratio of 11.96. Be aware a high current ratio may suggest that that company is not using its current assets efficiently, is not securing financing well or is not managing its working capital well. To better assess whether or not these issues are present, a liquidity ratio more specific than the current ratio is needed.
Cash Ratio - The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities. ... The cash ratio is generally a more conservative look at a company's ability to cover its liabilities than many other liquidity ratios because other assets, including accounts receivable, are left out of the equation. Facebook according to it's 2016 financial statement ratio is 3.56x. Meaning liabilities can be covered 3 and a half times without worrying about falling behind upon payments.
Cash and cash equivalents - This is essentially a companies rainy day fund of company that can be called up at a moments notice. Facebook's 2016 figure is 8,903 million and 2015 figure is 4,907 . Almost a doubling from it's base over a year ago.
i shall be posting a part two to this as i haven't fully finished going through the balance sheet and piecing everything together to help it make better sense. Anything you're unsure about do comment below and i'll be happy to answer questions.
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