- Using adjusted earnings, FB’s adjusted return on assets is projected to fall from 33% levels to 25% in 2015 – still more than twice the ROA most financial databases report.
- One culprit behind traditional metrics’ major distortions is GAAP accounting for goodwill, which amounted to $17.98bn for FB – this large figure leads to a significant understatement of FB’s economic.
- Another reason behind our significantly higher ROA’ is FB’s adjusted earnings of $5.81bn compared to as-reported earnings of only $2.94bn.
Performance and Valuation Prime™ Chart
For Facebook, there are many failures of GAAP that lead to a low-quality earnings number and an unreliable balance sheet. One major issue is the failure to consistently require capitalization of research and development expenses, which tech companies usually have in abundance. The natural “lumpiness” of the roughly $2.67bn expenditure in R&D results in earnings, margins, cash flow from operations, and return on assets that can fluctuate up and down materially from year to year, unlike economic reality.
GAAP requires R&D costs to be either expensed or capitalized from acquisitions as in-process, or written off later. The goodwill and intangibles from acquisitions compound the issues when research and development expenditures are involved. For Facebook, goodwill in the $18bn-$19bn range also creates material inconsistencies.