KARTIK MEHTA ROLL NO: 50 ADMI, SYMMS

Prof. Dr. R. GOPAL STRATEGIC MANAGEMENT Page | 1

Company Name: Facebook Inc.

Industry: Social Media

Submitted By: Kartik Mehta (Roll No: 50 | ADMI | SYMMS)

Facebook Annual Report Structure

Note About Forward-Looking Statements

Limitations of Key Metrics

PART I

Item1. Business

Item1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Mine Safety Disclosures

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accounting Fees and Services

PART IV

Item 15. Exhibits, Financial Statement Schedules

Signatures

Annual Report / Financial Analysis

Profitability: Average

As seen from the Ratio analysis, all profitability ratios have been going down gradually from the

previous year into this year. The reason for this is that Facebook’s operating expenses have gone

up. The major areas of spending were R&D and General and administrative expenses (mainly due

to increased hiring).

KARTIK MEHTA ROLL NO: 50 ADMI, SYMMS

Prof. Dr. R. GOPAL STRATEGIC MANAGEMENT Page | 2

However, these ratios are higher than the reported Industry average. One key point to note is that

while the industry profitability is negative, Facebook has positive profitability ratios.

Efficiency: Weak

Facebook’s Account Receivable turnover dropped by 35.88%, but it still considerably higher than

the industry average. Meanwhile, Asset Turnover reflected a steep drop of 42.5% to 0.3370, much

below the industry average of 1.1665.

Liquidity: Strong

Liquidity has increased due to the influx of equity. The Current ratio has more than doubled in the

last year, and is currently at 10.7101, more than 3 times larger than the industry average.

Solvency: Average

The solvency scenario of Facebook is relatively acceptable as it has been just 18 months since

Facebook announced its IPO. The Times interest earned fell to 10.5490 from 41.8095 opposed to

the industry average of -50.7389. The debt ratio, while dropping marginally, is well below the

industry average. However, the cash flow figures are very reassuring. The free cash jumped by

almost 420% to $872m, completely overwhelming the industry figure of $68.58m.

DuPont Analysis of ROE:

Ratio ROS x Asset Turnover

=ROA x Financial Leverage

=ROE

Type Profitability Efficiency Solvency

Formula NI/Rev Rev/A NI/A A/SE NI/SE Facebook 0.0063 0.337 0.0021231 1.2848 0.002727759 Industry -0.1699 1.1665 -0.198193289 1.7713 -0.351059773

Primary Driver of ROA is Asset Turnover. Primary Driver of ROE is Financial Leverage.

Significant current events and other information of importance the recent IPO of Twitter Inc. has

put the Facebook market activity into a lot of perspective. This makes Twitter only the second core

social networking company to be publicly traded, the first being Facebook.

Investment Decision: Invest

1. Free Cash Flow: The public trading of Facebook has brought in the equity needed to run and

execute operation/investment activities which are targeted at long term profits. This profit will pay

dividends to an investor.

KARTIK MEHTA ROLL NO: 50 ADMI, SYMMS

Prof. Dr. R. GOPAL STRATEGIC MANAGEMENT Page | 3

2. Debt: With the large volume of investment from the market, the Liquid Assets of Facebook have

multiplied signified significantly on account of equity. This has resulted in a lower debt ratio than

before.

3. Revenue and Gross Profit: The capital from the market has allowed Facebook to make large

investments on assets. These assets have helped increase the COGS and generate revenue for

the Company. This increased revenue has resulted in a 30% mark up on Gross Profit. Thus, we

can say that the IPO has facilitated immediate growth of the company. Investment now will result

in greater share prices and subsequent dividends in the long run.

4. Facebook’s investment in growth: Facebook is investing significant portion of its earnings in

R&D and expanding operations by increased hiring. This will help Facebook retain its first mover

advantage for the near future.

5. Growth Potential: Facebook’s Monthly Active Users in the highly populated Asia Pacific region

are increasing steadily. This opens up new revenue streams and could mean improved profits.

Conclusion

Facebook has built a comfortable lead in the social networking industry due to its first mover

advantage. This dominant position is however being challenged by offerings from well established

companies such as Google and from smaller regionally dominant players. The summarization of

trends in user activity and financial statements derived from the Form 10-K and from Facebook’s

annual report paint a good picture of the company’s current position.

The major risks that Facebook identified are:

1. Finances highly dependent on level of user engagement.

2. Revenues dependent on marketing cycle and spending.

3. Challenges in attracting more users and better monetizing opportunities.

4. Action by governments to restrict Facebook in their countries.

5. Securing user information.

6. Laws and Regulation regarding privacy can cause expensive litigations and may adversely

affect financial position.

7. Substantial debt and ability to raise capital to meet business needs.

The financial statement summary in the appendix section (derived from financial statements and

annual report) present a detailed picture of the firm’s operations and profitability.