Question

Instrucstions: Answer the last three questions using the information below. Facebook Inc. , (FB)
Ratios	Industry Average Ratio	Three Year Company Ratio Results
		2015	2016	2017
	Year(s)	Year	Year	Year
Debt/Equity	0.03	0.1173504	0.097425415	0.136885147
Current	5.12	11.24779221	11.96556522	12.91569149
Quick Ratio	4.92	2.549090909	3.096695652	2.148670213
Return on Assets	11.73	0.082532365	0.178668858	0.213185269
Return on Equity	14.55	0.09183953	0.197597958	0.238638321
Net Profit Margin	40.03	0.205711736	0.36967219	0.391951394
Instructions:
Discuss the following questions throughly (2-3 sentences).
What does each ratio reveal about the company?
Have the ratios improved or worsened over time? Explain why you think this happened.
Compare the company ratio results with the industry average ratios. What do the numbers reveal?

Answer 1

1. What does each ratio reveal about the company?

a. Debt/equity ratio = total liabilities/stockholder’s equity. This ratio indicates that debt, as a percentage of equity, for Facebook stood around 13.68% for the year 2017. In other words creditors of the company provide around 14 cents (13.68 is rounded off) for each dollar that is provided by the stockholders for financing its assets.

b. Current ratio = current assets/current liabilities. For 2017 the current ratio of Facebook stood at 12.92. This means that the company has around 13 times more current assets than its current liabilities. This high ratio shows that Facebook can easily make current debt payments.

c. Quick ratio = (current assets – inventories)/current liabilities. This ratio is a more stringent liquidity measure than the current ratio. For Facebook the ratio for 2017 stood at 2.15. This is lower than the company’s current ratio and means that Facebook has high amount of inventory in its books.

d. RoA = Net income/total assets. This ratio for Facebook stood at 21.32% for 2017 and means that each dollar of assets of the company earns around 21 cents as profits.

e. RoE = Net income/shareholder’s equity. This ratio for Facebook stood at 23.86% for 2017 and means that each dollar of equity of the company earns around 24 cents (23.86 rounded off) as profits.

f. Net profit margin = net profit/total revenue. This ratio for Facebook stood at 39.19% and means that the company earned 39 cents as profits for every dollar sales in 2017.

2. Have the ratios improved?

Debt/equity ratio increased in 2017 and this means that the company increased the level of debts in its books. This reflects an increase in the risk for its creditors. The company’s current ratio improved while its quick ratio declined. This may be due to high amount of inventory in its books. The company’s RoA and RoE increased and this means that the company is increasing its profitability, as also reflected by increase of its net profit margin.

3. Compare the company with the industry average: Debt equity of industry is only 0.03 and this means that Facebook is much more leveraged than its peers in the industry. The company also fares well in terms of current ratio and a higher ratio than the industry average means that Facebook has a better liquidity situation. However lower quick ratio of Facebook, when compared to the industry average, indicates that the company carries much more inventory than its peers in the industry. The company earns higher profits on its assets and equity, when compared to the industry average. The company’s net profit margin for 2017 was almost at par with the industry average.