This is part two of how to go through a balance sheet part two.
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. 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 that key terms are in Bold.
Market Capitalisation - In order to calculate a company's market cap. You would have to have numbers outstanding ( 2,317 million) x Share price as of Dec 30th 2016 (115.05) which is 226,570.85 million or 226 billion. This is essentially the price an investor would have to pay to purchase full ownership over Facebook..... Which is a lot of money.......
Market capitalisation to book value - This metric allows you to compare a company's book value to it's market cap. This is a very good metric for finding an undervalued company. Facebook's book value in 2016 was 38,537 an the company's market cap is 226,570.85. In 2016 we can see that Facebook has a market cap about 5.8x bigger then it's underlying value. This shows that it is very expensive purchases and therefore couldn't be considered a value investment.
Book Value per share - This metric is used to assess the price that a company is bought for compared to it's underlying value IE it's book value. To calculate the price to book valuation, you would need to know a company's (Total Assets - Total Liabilities) / Number of shares outstanding . so 64,961 - 5,767 which is 59, 194 divided by 2,317 to make $25.54 per share for the company's book value but the company trades at a valuation of $115.05 or 4.5x it's underlying value or it's price to book value. This therefore means that the company is too expensive and therefore cannot be considered a worthy investment to buy right now.
Free cash flow - Facebook 2016 free cash flow figure is 11,617 million for the year. FCF represents the cash that a company is able to generate after spending the money required to maintain and/or expand its asset base.
Price to free Cash flow - Facebook's 2016 Free cash flow figure is 11,617. This is the a company's operating cash flow minus Capital expenditure. To calculate this figure essentially do FCF divided by shares outstanding. 11,617 divided by 2317 is $5.01 per share. This measure signals a company's ability to pay debt(s), pay dividends, stock buybacks and facilitate the growth of business.
Free Cash Flow yield - Calculating a company's Free cash flow yield measures the percentage of it's Market cap relative to Free cash flow as a percentage. A high percentage shows that a company is very attractive and a low percentage is generally unattractive as he company has be considered expensive for it's current valuation. To calculate this figure you do Cash flow per share divided by Market cap her share. so $5.01 FCF per share divided by $115.05 (Dec 2016 share price) you get a meger 4% which is considered very poor as it shows the company is very expensive relative to the free cash it generates annually for dividend payments, business investments so on.
i shall be posting a part three 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.
If you have not yet seen part 1 than here it is for you. https://steemit.com/investing/@ldl/how-to-read-a-balance-sheet-ticker-aapl-apple-part-1
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