Facebook, Inc. (NASDAQ: FB) reported return on equity (ROE) of 8.97% for the 12 months ending in September 2015, with net income of $2.8 billion and average shareholders' equity of $31.3 billion. After the company's 2012 initial public offering (IPO), the increase in cash and shareholders' equity led to lower asset turnover and financial leverage, causing its ROE to fall to a level from which it has not rebounded. Since the IPO, net profit margin has been the primary factor causing its ROE to decline. Despite being low relative to its peers on asset turnover and the equity multiplier, Facebook's ROE falls in the middle of its benchmark range due to its net margin relative to its peers. Analyst forecasts call for earnings growth in excess of 25% over the next five years, which should send its ROE higher.
Historical and Peer Comparisons
For the quarter ending in September 2015, Facebook reported an ROE of 8.97%. This is lower than any full-year ROE since 2010, with the lone exception of 2012. Its ROE was 11.34% for the full-year 2014 and 24.05% in 2010. Though net income has generally increased rapidly in recent years, the value of shareholders' equity has grown even more quickly. Facebook also lags behind some its large-cap Internet information provider peers in trailing 12-month ROE. Baidu, Alphabet and TripAdvisor reported ROEs of 23.3, 14.8 and 19.2%, respectively. Facebook's ROE is superior to those of Yelp and Yahoo, while LinkedIn and Twitter reported net losses over the trailing 12 months. Overall, Facebook's ROE falls well within the range of its peers.
DuPont analysis is a useful tool for understanding which factors drive ROE by deconstructing the figure into three constituent metrics. Net profit margin, the asset turnover ratio and the equity multiplier for a company can be multiplied together to calculate ROE, and each element holds explanatory information regarding the company's operations. Facebook's 17.64% net profit margin for the 12 months ending September 2015 is lower than any recent year, other than 2012. In 2014, net margin was 23.5%, and every other recent year fell between 18 and 19%. The expense for research and development (R&D) has generally grown faster than revenues, helping to reduce net margin. Facebook's profit margin is relatively high among its peers, though it is exceeded by Baidu's 19.7% and Alphabet's 22.1%.
Facebook reported an asset turnover ratio of 0.45 over the 12 months ending September 2015. This value is very similar to those reported in the preceding four years, though asset turnover was much higher at 0.80 in 2011. The inflow of cash from the IPO was the primary element causing the drop in asset turnover. Most of Facebook's peers have higher asset turnovers, though Yahoo and Twitter are laggards for the metric. The average asset turnover ratio for peers was 0.53 for the trailing 12 months, indicating Facebook is using its assets slightly less efficiently to drive sales than its competitors. Asset turnover is a major factor driving lower ROE relative to 2010 and 2011, though it holds little explanatory value regarding fluctuations in ROE over the past five years. All of Facebook's peers with higher ROEs also have higher asset turnovers. The company's balance sheet swelled following its IPO, and much of those funds were used to acquire other firms, so sales growth from acquired businesses may be necessary to drive asset turnover higher.
Facebook's equity multiplier was 1.12 for the 12 months ending September 2015, a level significantly below that of 2010 and 2011 but similar to the past three years. Facebook's equity multiplier is the lowest among large-cap members in the Internet information provider industry. The group average financial leverage ratio is 1.5 and ranges as high as Baidu's 2.2. This indicates Facebook's assets are being financed relatively more by equity, while comparable peers maintain higher financial leverage in their capital structures.