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Chapter 1 : Learn Financial Modeling for Facebook Valuation

The hottest social network, our favourite - Facebook filed for an IPO with SEC. It turned out to be the most intriguing IPO ever and we thought why not cover it and let everybody learn the art of financial modelling.

We have been creating financial models and making them open source. We covered some other hot online properties – LinkedIn LinkedIn, Zynga and Groupon were close to the final valuation numbers (even we were surprised by the closeness). So we thought let’s try our luck and create a model to value Facebook and see if we come close this time as well!

Why Financial Modeling for Facebook?



The complexity in Valuing Real Companies

Valuing real companies is no child’s play. Although we advocate that financial modelling is 90% engineering and 10% art, but that 10% can change the numbers from 1 Bn to 10 Bn (If not 100!). There are so many variables that determine the valuation that it would take me a gazillion words to explain it and you would sleep by then.

The models that we created for other online properties IPO were quite complex. Readers loved it but deciphering them was an issue.

Let’s Start Simple

This time we decided to start Simple. We created a quick and dirty model for FB valuation and found that we got a valuation of ~ USD 81 Bn. Now that is close (to what I-bankers are thinking to be the valuation right now)! We open sourced the model open sourced the model.

Why Not Learn together?

Then an idea came to us! Why not share this learning with all the readers and help them see how to create this model on their own. The simple hope – If they learn with us today, they would contribute in creating the larger model. This model can be as realistic as one can create any company valuation model.

So we started working on creating the tutorials and the quizzes (who in this world would work, if there were no interesting quizzes and exams at the end of the day!)

The first Exam – Get historical statements

The first step in creating the model is to get the historical statements in place. So the first exam for you – Download the S1 filing (Hint: look for SEC), and get the numbers from the filing and fill in the empty template that you can download from here

Once you are done, you know your first step in modelling! In the next step we will see, how we do these steps and then share the best practices with all!

Come on … Lets value FB and see how rick Zuckerberg is gonna be!!

Next Step:

My experience of modeling tells me that 70% of the effort in creating the financial model goes in finding the relevant data to create the model. If you are starting new on modeling then this could be higher! So I thought before we start modeling for valuation of FB, why not let you find the data relevant to create the P&L (historical) for FB.

I hope that you found it yourself!

Where can I find Facebook’s Statements?

All companies want to take money from public (IPO - Initial Public Offering) to grow! Some do get a chance! : - ) [Facebook is one of them and believe me it’s going to take ~USD 5 Bn from people like you and me!]

So we are entitled to know the business of Facebook and how much money is it generating! The regulator ensures that and all the companies that access capital markets in US have to file S1 filing with the regulator. Mortals like you and me cannot get USD 5 Bn, but can always know what this 5Bn is going to generate! ;-)

So where do you get this S1 filing for Facebook?

Step 1:

Open Google (What else were you expecting??) and search for EDGAR

Step 2:

Click on the search result

Step 3:

Once the website is open, click on the Search for Fillings at the left side of the page

Step 4:

Inside the search for fillings click the Company or fund name

Step 5:

Enter your search information i.e. name of the company for which you need the S1

Step 6:

Click the Find Companies button (given at the bottom of the page)

Step 7:

All different types of fillings made by Subject Company will be shown on the page. Go to S1

Step 8:

Inside that you have to click on the file type There is an easy alternate way (Not scalable in long term)!

Next Steps

Now that you have the information with you, why don’t you try to fill the historical P&L? I am sure you would be able to do it now!!

Learn More:
Learn Financial Modeling for Facebook Valuation
Finding Facebook Statements Data to Model

Chapter 2 : Modeling the Historical P&L of Facebook

I hope that you all enjoyed modeling the historical Profit and Loss of Facebook. This part is a simple and it contains the filled P&L of Facebook, so that you can check your efforts for the past 2 days.

Discuss P&L of Faceboook



Where do I get the Profit and Loss data from the S1 filing

If you go to the consolidated financial statements section, you would get the complete Profit and Loss for Facebook.

How do I create the model then??

Most of the stuff (Revenue, Costs, etc.) just needs to be hardcoded in the P&L template. Some numbers like total revenue and incomes can be derived from the revenue and cost numbers.

Just remember two simple things

  • Revenue – cost = Profits!
  • Typically we would try to maintain a discipline: hard coded numbers in blue, calculations in black.

So did you get it right?

I am sure if you tried hard, you would have got it right. If not, let's discuss the issues that you faced and start learning together!

Next Steps

Now that we have the historical P&L in place, we move forward and create the Balance Sheet. Creating the Balance Sheet is similar to creating the P&L, most of the numbers are hardcoded and a few are derived. In the next video, we would release the empty template for the same. In the meanwhile, why don't you try to create it on your own? The data is with you in the S1 filing!

Learn More:
Modeling the Historical Profit and Loss of Facebook

Chapter 3 : Modeling Balance Sheet



Why Balance Sheet is called Balance Sheet?

Model the B/S

B/S Template

BASE Rule

  • B: Beginning
  • A: Additions
  • S: Subtractions
  • E: Ending

Chapter 4 : Cash flow satatement

Did you know that Apple has USD 94 Bn Cash with itself? That is more than the GDP of 66% of the countries of the world. Yes you heard it right! I am not speaking about 66% companies I am speaking about 66% of the COUNTRIES!

That was slightly off track!

In this part, we start building the most important financial statement: Cash flow statement!



What is Cash flow Statement?

I always say that Cash Flow Statement is the ONLY true statement in all the financial statements. It speaks about the real cash. The rest (Profit and Loss Statement of Facebook and Balance Sheet of Facebook) are accounting statements and I think they are just views! Cash flow statement speaks about how much cash flowed in and how much flowed out. REAL CASH!

How to Create Cash Flow Statement

There are 2 methods of creating the cash flow statement

  • Direct
  • Indirect

Direct is possible only if you have all the accounting entries with you (how much the company purchased, what out of it was cash, what was on credit etc.). Unfortunately we don't have that luxury.We just have the historical broad numbers with us! So we would be creating the Cash Flow Statement of Facebook through the indirect method

Cash Flow Template

My experience of modeling says that, Creating the Cash Flow Statement is a simple exercise for those who know but is tricky for those who don't (This statement is like the golden rule of Investing: BUY LOW SELL HIGH!)

I am giving you the template of an empty cash flow statement. Why don't you try to create it on your own?

We would be releasing the tutorials on the process to create the cash flow statement and I would keep guiding you on the process.

So what is the Cash Flow Statement?

Basically the Cash Flow Statement describes the sources and uses of a company's over a specified time period i.e. explains the changes in cash and cash equivalents during a period.

P&L or the income statement, which is prepared by accrual accounting is more of a view: A company may show profits and not generate any cash at all. The cash flow statement is a real statement and neutralizes the impact of the accrual entries on the other financial statements.

What is the structure of the cash flow statement?

It categorizes the sources and uses of cash to provide the reader with an understanding of the amount of cash a company generates and uses in its operations, provided by sources outside the company -borrowed funds or funds from stockholders, etc. The cash flow statement also tells the reader how much money was spent for items that do not appear on the income statement, such as loan repayments, long-term asset purchases, and payment of cash dividends.

Cash flow statements classify cash receipts and payments according to whether they stem from operating, investing, or financing activities.

What are the methodologies to create the Cash Flow Statement

We may prepare using the direct or indirect method. Usually in the S1 filing, you would find the cash flow statement from the indirect method. We can also derive the cash flow statement using the indirect method. Obviously not all line items might match with the statement published by the company, but broadly the sense of the statement would be achieved.

Steps in creating the Cash Flow Statement through the indirect method

Creating the financial statement is a tricky process if you are doing it for the first time. But once you know the algorithm, then creating the cash flow statement is like playing hangman, just make sure that you get the steps right.

There are two important steps (and one optional)

  1. Categorizing the Balance Sheet Items in Operating, Investing and Financing Activities
  2. Calculating the changes in Balance Sheet items and remembering that increase in assets is decrease in Cash
  3. (If Required) Match the P&L numbers to the difference in Balance Sheet

Analyzing and Classifying Balance Sheet Items

In this tutorial we discuss the first step in creating the Cash Flow Statement: Classifying the items in the Balance Sheet. Basically the classification has to be in one of the three parts of business:

  • Operational: Anything related to core operations of the business (Sale, Purchase, Inventory, etc.)that has a short term (<1 Year) impact
  • Investing: Anything that has a long term (> 1 year) implication (Plant, Machinery, Capital Expenditures, etc.)
  • Financing: Changes in sources of funds (New Debt, Equity, etc.)

Categorizing the Balance Sheet items in Facebook

In this figure you can see how the Facebook Balance Sheet items are categorized into different activities in the Cash Flow Statement.

Next Steps

In the next step, we move forward and see how changes in B/S can be used to estimate the amount of cash consumed/ released from the business

Keep Modeling!

Chapter 5 : Modeling B/S Differences as Cash for Facebook Model

They would tell you in B Schools that Projecting the Cash Flow Statement is Easy – Take the P&L (It has accrual accounting) and remove from it and there! You have the Cash Flow Statement. That is easier said than done.

But indeed if you have modeled it once, you would find that B School professors are right. It is just these two steps. It's just that the manual to do this is missing in B-Schools. I took you through the first step in the manual yesterday, so let me take you through the second step which is as simple as the first one and get the cash flow statement for Facebook in place.

Balance sheet difference as cash



Just Remember

*The Rows in the chart indicate the impact on Cash

Hint!! Just Remember that Increase in Asset = Decrease in Cash

Then you can easily derive the rest!

Once you have classified the items of Balance Sheet just take the difference of two consecutive years balance of each item and put under the respective head (Operating, Investing & Financing). It should give you the corresponding head of Cash flow Statement.

Important Items to Consider

While taking the differences in the Balance Sheet, it is important to note the following points:

  • We do not consider Cash from Balance Sheet (It's a Current Asset): This is because we are building the cash flow statement and it would come back as a balancing figure
  • Difference in Retained Earnings is not really investing: That would usually be the figure that you would get from Profit After Tax (PAT). Sometimes it is easy to project (as in the cash of Facebook) and sometimes you need to do a bit of Maths.

Indirect Method

So to calculate the Cash from operating activity, we start from Net Income (which would be like taking the difference of Retained Earnings) and adjust non-cash charges, non-operating items and changes in working capital (a balance sheet item).

Generally, any item that would be classified on the balance sheet as a long-term asset would be a candidate for classification as an investing activity and any item that would be classified on the balance sheet as either a long-term liability or equity would be a candidate for classification as a financing activity.

Cash Flow Statement for Facebook

We just take the difference in the historical Balance Sheet of Facebook and then adjust for the numbers from the P&L

Next Steps

Now our Cash Flow Statement is almost in place. We just need to make a few more adjustments and calculations and we are done with the Cash Flow Statement. In the next tutorial, we will learn how to calculate the closing cash balance and understand how it is linked with the B/S.

My experience tells me that, Preparation of Cash Flow Statement is like a Giant Step in your Modeling Career. Getting it right in the initial part of modeling career is a real high. I do hope that you are enjoying this process fully!

Chapter 6 : Cash as Balancing Figure

We are almost done with the trickiest part of the Facebook Model. We almost have the cash flow statement with us. Just to recap, the basic steps in creating the cash flow statements were:

  1. Categorizing Balance Sheet items of Facebook in Operating, Investing and Financing Activities
  2. Taking difference of two consecutive years and place it in the respective head in the Cash Flown Statement

If you remember we had also discussed the BASE Rule where we had discussed the generalized methodology of creating the closing accounts of the balance sheet from the other statements. It is time we put all our basic knowledge into action!



Joining the dots

Now that we have the basic elements of the cash flow statement with us and the pre requite knowledge to create the cash flow statement, we would find the real cash at the end of the year and ensure that it balances with the cash in the balance sheet.

Creating the final Cash Balance for Facebook

Today we calculate the closing cash balance for Facebook in the cash flow statement and ensure that it balances the cash in the balance sheet. Please note that this balancing is a basic error check in the model. If you are not getting it right, it is time to check your old numbers.

Remember: Closing Cash Balance = Beginning Cash Balance + Net Changes in Cash Flow

Try on your own and calculate the closing cash balance for the Facebook and see whether the resultant figure is the one that is given in the historical balance sheet.

Next Steps

Tomorrow we would release the cash flow statement of Facebook. You would see that the closing cash balance calculated in the Cash Flow Statement is same as the Cash in Facebook's balance sheet. Next step's integrated linked model would include all financial statements for Facebook

  • Income statement for Facebook
  • Balance Sheet for Facebook
  • Cash Flow Statement for Facebook (To be released)

Once we have the Cash Flow Statement in the model, we would clearly see the linkage between P&L,B/S and the cash flow statement.

Historical Cash Flow Statement of Facebook

If you have been following the posts till now, this post is as simple as it can be! This just releases the complete cash flow statement of Facebook. It is like a guide for you to check your efforts for the past few days. If you have been working hard, I am sure you would enjoy the glory today!

How do I create the model then?

The cash Flow statement for FB

Recap of the steps in getting the CFS in place

It is a matter of 2 minor steps: Categorizing Balance Sheet items of Facebook in Operating, Investing and Financing Activities and then taking difference of two consecutive years. Some numbers also need to be taken from the profit and loss account (i.e. Income Statement) like net profit.

Remember to maintain discipline: hard coded numbers in blue, calculations in black.

I am sure if you tried hard, you would have got it right. If not, let's discuss the issues that you faced and start learning together!

Release all your Pains on our forums and Blogs and we would be happy to discuss your modeling troubles!

Next Steps

Now that we have the historical financial statements of Facebook (P&L, B/S and CFS) in place, we move forward to model historical drivers. Historical drivers are like crystal balls to predict future. Most of the revenue drivers would be in the form of growth and Costs would be %ages of Revenue. We would give more details tomorrow. In the meanwhile try to build historical drivers on your own!

Chapter 7 : Drivers and Assumptions

If you remember (I am sure if you are concentrating on modeling rather than Facebooking, you would at least remember a bit), we are creating a simple model to estimate the value that Facebook will have (and hence be in awe with the worth of Mark Zuckerberg! ;-))



Steps till Now

We have already modeled the historical statements:

Way forward

From now onwards we will shift our focus towards projecting the future of the Facebook. Now we move forward and find the drivers for the business. This is a simple model, so the drivers would be simple.The contest would have a more detailed model and hence would have detailed drivers!

Please note that projecting future is like looking into crystal balls - a subjective matter and forecasters are required to know about the past performance & growth of the company, managements & analysts view about the company and overall economy's outlook/condition.

So your next exercise is to start modeling the historical drivers of FB. You have modeled P/L, B/S which we would use to calculate the drivers. We have the S1 filing of Facebook which can be used to understand the Management Discussion regarding the scope of the business. Using these two we can try to model the historical drivers.

What is Historical Drivers?

Historical drivers are the drivers which are like driver of a bus (in this case your business!!)!! These could be ratios of past performance and growth of a company.

For example, simplistically speaking:

Revenue = Price x Volume

So the driver of revenue is Price and Volume! If I break this further,

Price = function of demand and supply

Then the driver of Price could be the demand and supply and so on…

These drivers along with the management's and analyst views are used to formulate the assumptions needed to project the future P/L and B/S of any company.

Template for Historical Drivers

I have for you a simple template to model the historical drivers for Facebook. Please note that this is a simple model and hence the drivers are simple (It would be appropriate to say that these are broad drivers!)

Download the template and try to use these simple drivers to model the business.

Go ahead. Understand what is driving Zuckerberg to be so rich!

Next Step:

We already have the historical statements in place with us. We had started discussing the historical growth drivers and had released the template for historical driver. This was obviously a very simple template and as the model becomes more exhaustive you can improve this to include more realistic scenarios.

Drivers are the most important part of the model and I would like to give you another chance of getting the drivers right yourself! Today I give you a simple hint on historical revenue drivers, and you should try to build the drivers on your own.

Growth as a driver of Revenue

Usually companies have an agenda of growing their revenues. It is important to measure the growth. So revenue drivers can be developed by calculating the historical growth rate in revenue. These can be

  • Year on Year Growth Rate (YOY): It is the rate of change expressed over the corresponding period of the previous year.
  • YOY = (Ending Value/ Starting Value) - 1

  • Compounded Annual Growth Rate (CAGR): It is an average growth rate calculated over a period of several years. It is the geometric mean of the annual growth rate.
  • CAGR = {(Ending Value/ Starting Value) ^ (1/Number of Years)}-1

Importance of Revenue

Revenue also called the "top line" or "gross income" is probably the most important item in income statement. Revenue is recognized based on accrual accounting.

Revenue is the first line item in the P&L and we deduct costs from it to get our profits. These profits (in one way or the other) drive the price of the stock. So in effect we can say that revenues are (one of the most important) factors driving the stock price and the shareholder wealth.

There are several financial ratios attached to it, the most important is the profit margin. If any number in the P&L (Gross Profit, EBITDA, PBT, etc.) is divided by Revenue, we get the Margin, which indicates that for each USD of sale, what is the profit we are making?

Next Steps

Next we speak about modeling the cost drivers of Facebook.

Next Step:

Let's discuss the modeling of other important P/L drivers and the cost drivers. Cost drivers are elements that cause cost to be incurred. It includes various operating and non-operating costs.

Modeling Simple Cost Driver

We can express costs as percentage (%age) of revenue (sales). The basic assumption behind this driver is that the cost would scale to support the scale in revenues!

For example,

Let's say today I have 10 servers supporting a user base of 10,000 unique users, which results in USD 100,000 of revenues.

Tomorrow, if I want to grow my revenues to USD 1,000,000, I would need a unique user base of 100,000, for which I would need 100 servers.

Hence most of the costs scale as per revenue! Please don't burn me for saying this! I know that this is a simplistic assumption! But then, this is a simple model as well!

Modeling Facebook's Cost Drivers

Understanding the cost drivers is important as it tells you what affects the total cost the most. It helps you to focus on areas where the largest cost are incurred, because the larger the total cost the smaller the bottom line (profit).

We calculate most of costs drivers as a percentage of revenue. Provision for income tax is calculated as percentage of earning before tax (EBT).

This is a very simple exercise. I am sure; you would quickly get this in place!

Please note: Cost Drivers are NOT growth Drivers! These are derived from Revenue

Next Steps

As a next step, we would understand modeling techniques for B/S drivers of Facebook. I am sure after knowing how to model P/L drivers you'll be able to model the B/S drivers of Facebook on your own.

Next Step:

Till now, we have modeled the historical statements (P/L, B/S & Cash Flow Statement) and P/L drivers.

Today's post is to help you in modeling balance sheet drivers.

Balance Sheet Drivers

Balance sheet drivers are both mixed and pure ratios. By mixed ratio we mean ratios calculated taking into consideration both P/L and B/S line items and pure rations means ratios calculated using only the B/S line items.

A/c receivable Turnover = Revenue/Average Receivable

Days of Account Receivable = 365/A/c Receivable Turnover

I.e. Days of Account Receivable = Average A/c Receivable/ (Revenue/365)

Using the same formula you can calculate the payable in days, calculate prepaid and accrued expenses by calculating year-on-year growth rate and other drivers as %age of revenue.

Please note that this is a simple model and hence the drivers are simple. And also note that we will use these drivers to project the future Balance Sheet of Facebook.

If you find any problem in modeling B/S drivers feel free to discuss this in our comments or email me your queries, we would love to answer you queries.

Next Steps

We will release filled template of historical drivers (both P/L & B/S drivers), so that you can check your progress.

Next Step:

Filled Historical Driver

In the previous two posts we gave you hints on how to model P/L & B/S drives. This section has just a filled template of Historical Drivers of Facebook, so that you can check your efforts and see whether you modeled Historical Drivers of Facebook as we did. And I am sure yours going to match with ours.

Recap of the steps in getting the historical drivers in place P/L

Revenue drivers are model using the YOY or CAGR concept.

Most of the cost drivers are calculate as percentage of revenue while provision for tax is calculated as percentage of earning before tax (EBT).

B/S

Balance sheet drivers are modeled by calculating mixed and pure ratios.

I am sure if you tried hard, you would have got it right. If not, let's discuss the issues on our forum.

Next Steps

Next we will focus on modeling assumption needed to model projected P/L & B/S of Facebook, so next we will be releasing an unfilled template for you to try on your own to model the assumptions needed to forecast the future financial statements of Facebook.

Next Step:

Now that we have the historical drivers in place, we enter into the ART part of the model. We need to make assumptions about what could happen in future! This is like looking at the crystal ball and trying to predict future. There are no right answers and your guess could be better than mine, only if you have been tracking that industry/ company for some time ad you are very lucky! ;-)

What are assumptions?

Assumptions are inputs in a model which you assume to project the future financials! For example, if I assume that the revenue for Facebook in the next year is going to be a growth of 10% on last year's revenue, then my 10% growth is an assumption! Obviously there could be arguments for and against any assumption that you make about future!

More scientific Basis of making assumptions

To give more sanity to the future assumptions, we use the following as a guide to predict:

  • Historical drivers (That we calculated in the last step)
  • Management Discussion and Analysis (MD&A) and analyst's views about the Facebook
  • Typically historical trends repeat themselves and management is going to run the business. So both are quite important to make (an intelligent) guess about what could happen in future!

    Next exercise is on modeling assumptions taking into account the historical drivers and Management Discussion & Analysis (MD&A) given in the S1 of Facebook.

    Why Assumptions are important?

    Modeling assumption is a subjective matter (more of a guess!) and may suffer from subjective biases.Everybody looks at a statement from his own lens and personal prejudices play an important role in projections!

    For example, you and your friends add 50 friends in a year in your Facebook account and start wondering. Each of my friends is going to add 50 friends in a year and this virus (i.e. viral growth) is going to spread like wild fire. You start looking at world from your perspective and start building assumption based on your thoughts and judgments.

    Somebody would step back and wonder - Whether you are adding totally new set of friends (people who were not knowing/ attached to Facebook earlier) or adding the one who already have a Facebook account (members of Facebook community)???

    What is the correct the assumptions and correct the valuation of Facebook would depend on what you think about the virality and its logic.

    Assumption Template

    This is a simple model and we build simple assumptions. It has simple steps to build assumptions

Make your guess and build reasonable and supportive assumptions for Facebook. You can make this step more robust and build better assumptions by trying harder! We leave that as a part of contest that we are planning to run soon on valuing Facebook!

Next Steps

Next, we will provide you hints on modeling assumptions of Facebook. Till then delve deeper into S1, read more analysis and report. It all helps in making better predictions. Go on and value the future of social networking by building assumptions on Facebook valuation.

Next Step:

Developing Assumption

We already have the historical growth drivers in place with us. In the last part we had started discussing regarding the importance and steps in building assumptions for the model. We had released a simple template for Assumption building for Facebook Valuation.

Assumptions are probably the only ART part of the model and play the most important role in valuing companies. Now I give you a simple hint on Assumption building for Facebook Valuation, and you should try to build the Assumption for Facebook Valuation.

How to model assumptions?

The simple methods for modeling assumptions are

  1. Analyzing the management discussion & analysis (MD&A) section of the S1, competitors move, regulatory & legal issue related to subject industry, unique issue of the subject company, analyst's views and the overall economic activity effect on the subject company & industry and thereafter basing your decision on this analysis to model the assumptions.
  2. Analyzing the past performance of the subject company by calculating its historical drivers, finding the trend and basing your decisions on the same.
  3. Using the combination of MD&A and past trends (Mosaic Theory*) rational thinking tells me that this would work out to be the best!

*Mosaic Theory allows collecting public, non-public and non-material information about a company in order to determine the value of the subject company's securities.

Building Assumptions for Facebook Valuation

Based on our view on the industry and past performance, we have made our assumptions: example







What do you think?? Where would FB go from here?

Share your thoughts!!

Next Steps

Next, we will provide you the filled assumptions layout. Till then explore the S1, historical drivers and the world of internet to analysis and interpret the future of social networking to build the assumptions on valuing FB!

Chapter 8 : Projecting the statement

If you remember (I am sure if you are concentrating on modeling rather than Facebooking, you would at least remember a bit), we are creating a simple model to Projecting Financial Statements for Facebook (and hence be in awe with the worth of Mark Zuckerberg! ;-))

Recap on Facebook Valuation Tutorial Course

We have already modeled:

  • The historical statements of Facebook: The P/L & B/S mostly was hardcoded, with a few derived numbers and cash flow statement was modeled using the indirect method and derived from the historical B/S and P&L
  • The Historical Drivers of Facebook: Mostly were calculated as %age of Revenue and some as year-on-year growth rate. The few balance sheet historical drivers were calculated in days and so on.
  • The Assumption of Facebook: Mostly this was modeled by taking the average of historical drivers and by using S1 and public, non-public and non-material information of the Facebook.
  • From today onwards we start Projecting Financial Statements for Facebook using the modeled assumptions.



    Projecting the Statements

    Today's exercise is to start modeling the future P/L, B/S and Cash Flow Statement of FB. Once we have the projected future P/L, B/S and Cash Flow statement of Facebook. Once we have the cash, it will be easy to estimate the value that FB and Mark Zuckerberg will have!

    Template for Projected Statement

    I have for you a simple template to project the future financial statements for Facebook.

    Download the template and try to project the future P/L, B/S and CFS of the Facebook using the assumptions modeled in the previous exercise.

    Go ahead and predict how rich Zuckerberg is gonna be!!!

    Next Step:

    We have been discussing the process of building assumptions for the last two parts. Now, we share with you, our view on the future drivers for Facebook. We release our Assumption Layout for Facebook valuation.

    Caution! These are views and perceptions. Yours could be way different from mine! But I would like to hear yours! Speak up!

    Completed Assumptions for Valuing FB?

    Recap of the steps in getting the Assumptions in place

    Assumptions are modeled by taking in view the following, Download Assumptions Layout

  • The historical drivers
  • Using Management Discussion Analysis (S1)
  • Other public and non-public, non-material information

I am sure if you tried hard, you would have got the Right assumptions. Let's discuss the issues on our Assumption Layout for Facebook valuation forum.

Next Step

Now that we have the assumptions ready, we focus on projecting financial statement (P/L & B/S) of Facebook. As a next step, we will start with the unfilled template to project the financial statements of Facebook.

Next Step:

We already have the assumptions for modeling financial statements of Facebook in place with us. In the last tutorial we had started discussing regarding projecting future P/L, B/S and CFS of Facebook. We also had released a simple template for modeling future P/L, B/S and CFS of Facebook.

Projecting future financial statements is a part of complete financial analysis, done by using the assumptions modeled for the subject company. These Projecting Financial Statement for Facebook (P/L, B/S and CFS) are than used in present value based formula (DCF) to access a company's market value. I give you a simple hint on using assumption to model the Projecting Financial Statement for Facebook and you should try to build the future statements of Facebook on your own.

How to model Projecting Financial Statement for Facebook?

Modeling future P/L Statement uses the assumptions related to each line item in the P/L statement

Example:

Likewise modeling future B/S uses the assumptions related to each line item in the B/S.

Example of selected B/S items is given as follows:

Note: Remember to complete Balance Sheet modeling you have to link cash & cash equivalents in the balance sheet with the closing cash balance calculated in the cash flow statement.

Once future P/L & B/S is in place, modeling future cash flow statement (CFS) becomes a simple exercise because you have already categorized and linked the CFS with the P/L and B/S while modeling the historical cash flow statement. Now you just need to drag the formula till the required number of periods.

I hope you all will be able to do it correctly!!

In case you find any problem in modeling future P/L, B/S and CFS please write in our forum/blog, we will like to answer you queries.

Next Step

We will release filled template of projected future financial statements (P/L, B/S & CFS), so that you can check your progress.

Next Step:

If you have been following the posts till now, this post is as simple as it can be! This just releases the complete Projected Statements for Facebook. It is like a guide for you to check your efforts for the past few days. If you have been working hard, I am sure you would enjoy the glory today!

Projected Statements for Facebook?





Recap of the steps in getting the Projected Statements for Facebook

Modeling future P/L & B/S Statement uses the assumptions related to each line item in the respective statements.

Note: Remember to complete Balance Sheet modeling you have to link cash & cash equivalents in the balance sheet with the closing cash balance calculated in the cash flow statement.

Modeling future cash flow statement (CFS) becomes a simple exercise once future P/L & B/S are in place, because you have already categorized and linked the CFS with the P/L and B/S line items while modeling the historical cash flow statement. Now you just need to drag the formula till the required number of periods!!

I am sure if you tried hard, you would have got the Right forecasted statements of Facebook. If not, let's discuss the issues on our forum.

Next Step

Now that we have the complete historical and Projected Statements for Facebook, we focus on performing ratio analysis of Facebook. Next we will start with the unfilled template to perform financial ratio analysis of Facebook.

Chapter 9 :Ratio Analysis

Now that we have the future projected Financial statements in place, we enter into the Performance Measurement part of the model. We need to Performing Ratio Analysis for Facebook to see what has happened and what could happen in future! This is like looking at the crystal ball and trying to Performing Ratio Analysis for Facebook.

This exercise is on modeling ratio analysis taking into account both the historical and future financial statements of Facebook



Template for Performing Ratio Analysis for Facebook

I have for you a simple template to measure the performance of Facebook.

Go ahead and find the past as well as expected future performance of Facebook!!!

Next Step

In the next step, we will provide you hints on performing ratio analysis for Facebook. Till then go on and measure the future of social networking by performing ratio analysis for Facebook valuation.

Next Step:

In the last tutorial we had started discussing regarding the ratio analysis for the Facebook model. We had released a simple template for Ratio Analysis Formula for Facebook.

I give you a simple hint on performing Ratio Analysis Formula for Facebook, and you should try to build the financial ratios of Facebook on your own.

How to perform ratio analysis?

Ratio Analysis Formula for Facebook is performed by calculating pure and mixed ratios. Pure P/L ratios are calculated using only P/L line items and pure B/S ratios are calculated using only B/S line items. The mixed ratios are calculated using both the P/L and B/S line items.

Profitability Ratios (Pure P/L Ratios)

Gross Profit Margins = Gross Profit / Revenue (sales)

EBITDA Margins = EBITDA / Revenue (sales)

EBIT Margins = EBIT / Revenue (sales)

EBT Margins = EBT / Revenue (sales)

Net Profit Margin = Net Profit / Revenue (sales)

Return on Investment Ratios (Mix Ratios)

Return on Assets (ROA) = Net Profit / Average Assets

Return on Stockholder's Equity (ROE) = Net Profit / average Equity

Liquidity Ratios (Pure B/S Ratios)

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = Current Liquid Assets / Current Liabilities

Defensive Interval Ratio = Current Liquid Assets / Daily Operating Expense - (Mix Ratio)

I am sure after looking at this post you can easily calculate the financial ratios for Facebook.

What do you think about Facebook's performance??

Share your thoughts!!

Chapter 10 : Valuation

Template for FB Valuation using DCF







What is DCF?

Most Common Free Cash Flow Definition

  • Free Cash Flow to Firm (FCFF)
  • Free Cash Flow to Equity (FCFE)

Calculating Cost of Capital

  • Weighted Average Cost of Capital
  • Cost of Equity

EduPristine provide's both online and classroom training for Financial Modeling by the end of which you will be able to analyse the cash statements and build models and provide dynamic projections that can be used to thoroughly analyze the company from multiple standpoints such as operations, investment, financing and valuation.

In case of further doubts, you can post your questions on the EduPristine forum.

Disclaimer

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