ASSIGNMENT COVER SHEET FOR SUBMISSION OF INDIVIDUAL AND GROUP WORK

Course title Advanced Educational Program, Finance 55BSubject Fundamentals of Corporate FinanceLecturer Professor Taewon YangAssignment # 1WeightageSubmission date 1st July 2015 Maximum # of words Actual # of words 4311Student declaration:1. This assignment is my/our original work and no part of it has been copied from any other student’s work or from any other source except where due acknowledgement is made.2. I/we understand what is meant by plagiarismStudent name Student IDHo Minh TrangNguyen Thi Phuong AnhVu Linh 11132356Nguyen Trung HieuNguyen Dieu Linh

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National Economics University

Content

Introduction......................................................................................................................................1

Income Statement Analysis.............................................................................................................2

Balance Sheet Analysis.…………………………………………………………………………...6

Ratio Analysis…………………………………………………………………………………...12

Cash Flow………………………………………………………………………………………..16

Performance Evaluation…………………………………………………………………………18

Introduction

Twitter is an online social networking service that enables users to send and read short 140-

character messages called “tweets”. It was created in March 2006 by Jack Dorsey, Evan

Williams, Biz Stone and Noah Glass and launched by July 2006. The service rapidly gained

worldwide popularity, with more than 100 million users who in 2012 posted 340 million

tweets per day. The service also handled 1.6 billion search queries per day. In 2013 Twitter

was one of the ten most-visited websites, and has been described as “the SMS of the

Internet”. As of May 2015, Twitter has more than 500 million users, out of which more than

302 million are active users.

In this report, we are going to handle the company’s income statement, balance sheet, cash

flow, as well as analyze its financial ratio, before topping things off by giving an evaluation

of how well the company fared in the recent years.

1

Income Statement Analysis

Period Ending  Dec 31,

2014Dec 31,

2013Dec 31,

2012Total Revenue   1403002 664,890   316,933  Cost of Revenue   446309 266,718   128,768  

Gross Profit   956,693   398,172   188,165    Operating Expenses        Research Development 691,543   593,992   119,004  

 Selling General and Administrative

804,016   440,011   146,244  

  Non Recurring -   -   -    Others -   -   -  

 Total Operating Expenses

1,495,559 1,034,003 265,248

Operating Income or Loss

  -538,866 -635,831 -77,083

 Income from Continuing Operations

     

 Total Other Income/Expenses Net

-5,500 -4,455 399  

 Earnings Before Interest And Taxes

-578,351 -647,146 -79,17

  Interest Expense -   -   -    Income Before Tax -578,351 -647,146 -79,17  Income Tax Expense -531 -1,823 229    Minority Interest -   -   -  

 Net Income From Continuing Ops

-577,820 -645,323 -79,399

  Non-recurring Events      

 Discontinued Operations

-   -   -  

  Extraordinary Items -   -   -  

 Effect Of Accounting Changes

-   -   -  

  Other Items -   -   -  Net Income   -577,820 -645,323 -79,399Preferred Stock And Other Adjustments

  -   -   -  

Net Income Applicable To Common Shares

  -577,820 -645,323 -79,399

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All numbers are in thousand

Income statement: A statement that measures a company's financial performance. It also

shows the net profit or loss incurred over a specific period of time, typically over a fiscal

quarter or year.

1) Revenues: The amount of money that a company actually receives during a period.

It has risen significantly for the last three years. Total revenue in 2014 is 1,403,002, which

was twice as much as 2013’s and surpassed 2012 by about 4,4 times. It is due to Twitter’s

business strategy to improve the amount that the company sold. Increased revenue means

more money coming in, which means more money for paying salaries, more money for

research and development, more money for factory expansion or more investment back into

the business.

2) Gross profit: Indicates how efficiently management uses labor and supplies in the

production process.

Gross profit = Revenue – Cost of revenue

Twitter has seen a growth in gross profit from 188,165 in 2012 to 956,693 in 2014. It

reflects how well the company uses resources and produces the goods and services. We can

also calculate:

Gross profit margin = Gross profit / Revenue

This proportion is essential as the bigger the gross profit margin is, the more profitable the

company can be before consideration of general and administrative expenses. From

Twitter’s Income Statement, it has changed from 40,6% in 2012 to 68,2% of sales in

2014. You can tell that the company improved its sales quite efficiently.

3) Expenses: 

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Operating expenses includes Research Development and Selling General and Administrative

Expense. The company has spent much money on improving products and service than

others competitors like Facebook, Google,… It is pointed out clearly as R&D expense

represents nearly fifty percent of sales in 2014.

In Selling General and Administrative Expense, we have some costs like rent, salaries and

money spent on office supplies. This expense in 2014 surpass 2012 by about 5,5 times.

These two elements have led to a growth in operating expense. However, the fact that

expense is much greater than revenue indicates that Twitter’s operating results can be harm

as it costs more than it earns a profit.

4) Earning before interest and taxes (EBIT) and Earning before tax, interest,

depreciation and mortization (EBITDA): An indicator of a company's profitability.

EBIT = Revenue – Cost of goods sold – Operating expenses

Twitter’s EBIT was negative and declined heavily for the last three years. It dropped from -

79,170 in 2012 to -578,351 in 2014. Reduction in revenue and higher operating cost had led

to the decrease in this factor. Negative EBIT means that the company is not selling enough

to cover its fixed costs. Therefore, it is a bad thing as the venture does not have enough

earnings to pay for any expenses. Base on this formula:

EBITDA = EBIT + Depreciation

for the last three years, we have -343,700; -532,795; -2,562 respectively. Negative EBITDA

results from negative EBIT. It indicates that Twitter has fundamental problems with

profitability and cash flow.

5) Net income: Company's total earnings or profit

Net income = Sales – Expenses

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Net income in 2012 is not only negative but is also $565,924 higher than that of 2013. We

can conclude that Twitter have suffered from a net loss when expenses exceed sales. A

company with a net loss has not made a profit and spending more to operate than it earns

through its operations. It needs ongoing capital infusions to keep operating.

6) Profit margin: Measures how much out of every dollar of sales a company actually keeps

in earnings

Profit margin = Net income / Total revenue

This porpotion from 2013 to 2014 is -0,97 and -0,4 respectively. Despite the increase, they

are still negative numbers. Negative net income has led to this result. A low profit margin

shows a decline in margin of safety.

Balance Sheet5

Period Ending Dec 31, 2014 Dec 31, 2013 Dec 31, 2012

Assets

Current Assets

Cash And Cash Equivalents 1,510,724 841,010  203,30

Short Term Investments 2,111,154 1,393,044 221,528

Net Receivables 418,454 247,328 112,155

Inventory -  -   -  

Other Current Assets 215,521  93,297  17,455

Total Current Assets 4,255,853  2,574,679 554,466

Long Term Investments -   -   -  

Property Plant and Equipment 557,019 332,662 185,574

Goodwill 622,570 363,477 68,813

Intangible Assets 105,011 77,627 3,753

Accumulated Amortization - - -

Other Assets 42,629 17,795 18,962

Deferred Long Term Assets Charges -  - -

Total Assets 5,583,082 3,366,240 831,568

Liabilities

Current Liabilities

Accounts Payable 281,474 138,304 61,043

Short/Current Long Term Debt 112,320 87,126 48,836

Other Current Liabilities -   -   -

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Total Current Liabilities 393,794 225,430 109,879

Long Term Debt 1,494,970 110,520 65,732

Other Liabilities 43,209 20,784 19,437

Deferred Long Term Liability Charges 24,706 59,500 12,156

Minority Interest -   -   -  

Negative Goodwill -   -   -  

Total Liabilities 1,956,679 416,234 207,204

Stockholders' Equity

Misc Stocks Options Warrants - - 835,430

Redeemable Preferred Stock - - 37,106

Preferred Stock - - -

Common Stock 3   3   1  

Retained Earnings -1,572,446  -994,626  -349,303

Treasury Stock - - -

Capital Surplus 5,208,870 3,944,952 101,787

Other Stockholder Equity -10,024 -323 -657

Total Stockholder Equity 3,626,403 2,950,006 -248,172  

Net Tangible Assets 2,898,822 2,508,902 -320,738

Balance Sheet: It cannot be denied that looking at Balance Sheet is helpful for investors,

investment bankers, shareholders, financial institution for verifying the profitability of

investment for a specific company.

1) Cash and Cash Equivalent:

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CCE is an item on the balance sheet that reports the value of a company's assets that are cash

or can be converted into cash immediately. CCE also illustrates the amount of money that

the company has in bank accounts, savings or certificates of deposit. It cannot be denied that

the more cash on company’s hand, the better since the company can pay for dividends,

repurchase shares or pay debt punctually.

Looking at the Balance Sheet of Twitter, from 2013 to 2014, the amount of money of

Twitter increased from 841,010 to 1,510,000, nearly doubled. It shows that Twitter has

better its ability to expense by using cash immediately.

2) Short-term investment:

This account contains any investments that a company has made that will expire within one

year. For the most part, these accounts contain stocks and bonds that can be liquidated fairly

quickly.

In 2 years, 2013 and 2014, Twitter increased short-term investment to more than 1 millions

(66%), from 1,393,000 to 2,111,000.

With strong ability with cash, the company can afford to invest excess in stock and bond to

earn higher interest than what could be earned from normal savings. With the amount of

stock and bonds in the market, the company can raise investments and use the money to

invest into operating activities.

3) Net receivables:

Money owed by its customers – Money will never be paid (Bad debts)

Net receivables are often expressed as a percentage; the higher the percentage, the more

money a company is able to collect from its customers and the better off the company is.

NR of Twitter changes from 247,000 to more than 400,000, nearly 60%. It shows the

amount of money the company is able to collect is increasing within a year. Therefore, bad

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debt ratio is low. It also shows that the money the company lose through lending is getting

lower through time.

4) Total assets-Total Liabilities:

This is the account which the investors review before determining whether or not the

business has enough existing value to make an investment.

A company's total liabilities can be split up into two basic parts, short- and long-term

liabilities. Short-term liabilities are typically liabilities which are due within one year or less.

Long-term liabilities are those with a time horizon of maturity is past the one year point.

Liabilities such as loans, leases and taxes due can fall into either category.

Through a 2-year period, Twitter’s TA was getting bigger and bigger, from 3 mil to 5 mil

(67%) . The same thing happened with TL. TL is bigger because of long-term debt, from

110,000 to 1,410,000 (1181%). Bank loans and financing agreements, in addition to bonds

and notes that have maturities greater than one year, would be considered long-term debt.

It can be easily seen from the Balance Sheet that Total Assets is bigger than Total Liabilities.

It shows that the financial standing and performance of the company are good.

5) Net Working Capital:

Net Working Capital is calculated by Current Assets minus Current Liabilities:

NWC = CA – CL

As can be calculated from Balance Sheet, Net Working Capital in 2013 and 2014 changes

from 2,349,249 to 3,862,059, which means nearly 60%. With this growth, company can pay

debt to creditor punctually. Meanwhile, it can decrease

6) Retained earnings: 

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Twitter company retains its earnings in order to invest them into areas where the company

can create growth opportunities, such as buying new machinery or spending the money on

more research and development.

As can be calculated, the retained earnings of Twitter is negative through years, from 2012

to 2014. It does have some developments, however, negative trend is not a good thing for a

company like Twitter. Should a net loss be greater than beginning retained earnings, retained

earnings can become negative, creating a deficit.

7) ROA = NET INCOME/ ASSETS

The ROA figure gives investors an idea of how effectively the company is converting the

money it has to invest into net income. The higher the ROA number, the better, because the

company is earning more money on less investment.

ROA increased means that the company is able to convert investment nearly 91% into profit

better, however, it’s still NEGATIVE. When a company has a negative ROA, it means that

the company is investing a high amount of capital into its production while simultaneously

receiving little income.

If a negative ROA is accompanied by high levels of debt, the effect of the negative ROA is

magnified. Businesses often decide to increase their debt when they anticipate a positive

future ROA -- a potentially risky strategy that can result in management having to explain its

decision if ROA turns out to be less than expected or, worse, negative.

8) Good will, credit rating, current project. 

The value of goodwill typically arises in an acquisition when one company is purchased by

another company. The amount the acquiring company pays for the target company over the

target’s book value usually accounts for the value of the target’s goodwill. If the acquiring

company pays less than the target’s book value, it gains “negative goodwill”, meaning that it

purchased the company at a bargain in a distress sale.

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Goodwill of Twitter rises in 2014 twice as much as 2013. It means, in the view of investors,

Twitter is becoming more and more valuable.

Ratio Analysis

Dec 31,2014 Dec 31,2013 Dec 31,2012Short term solvency

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Current ratio 10,80730788 11,42119061 5,046150766

Quick ratio 10,80730788 11,42119061 5,046150766Cash ratio 3,83633067 3,730692454 1,850471883NWC to total assets 0,691743198 0,697885178 0,534636975

Long term solvencyTotal debt ratio 0,350465746 0,123649532 1,298438612Debt- equity ratio 0,539564687 0,141095984 -0,834920942Equity multiplier 1,539564687 1,141095984 -3,350772851Time interest earned

long term debt 0,291908049 0,03611144 -0,360293795Asset managementInventory turnoverDay's sales in inventoryReceivable turnover 3,352822532 2,68829247 2,825848157Day's sales in receivable 108,8635013 135,7739175 129,1647604NWC turnover 0,363278241 0,283022362 0,712870597Total asset turnover 0,251295117 0,197517111 0,381126979

Profitability Profit margin -0,411845457 -0,970571072 -0,250522981Return on asset -0,099912557 -0,191704394 -0,095481067Return on equity -0,153821845 -0,218753114 0,319935367Earning per share -0.860363311 -0.960874032 -0.118223645

1) Current ratio: The current ratio is a liquidity and efficiency that measures a firm's ability

to pay off its short-term liabilities with its current assets. The current ratio is an important

measure of liquidity because short-term liabilities are due within the next year.

The current ratios for Twitter in the year 2012, 2013, 2014 are 5.0; 11.42 and 10.8

respectively. According to the definition, the higher the ratio is, the greater the ability the

firm has to pay its bill. In three years, Twitter has been improving liquidity and efficiency,

because current ratio is improving.

2) Quick ratio: The quick ratio or acid test ratio is a liquidity ratio that measures the ability

of a company to pay its current liabilities when they come due with only quick assets. Quick 12

assets are current assets that can be converted to cash within 90 days or in the short-term.

Cash, cash equivalents, short-term investments or marketable securities, and current

accounts receivable are considered quick assets.

The quick ratios for Twitter in the year 2012, 2013, 2014 are 5.04; 11.42 and 10.8

respectively. Base on these results, Twitter can totally cover its total current liabilities by its

quick assets. Higher quick ratios are more favorable for companies because that would mean

there are more quick assets than current liabilities. The ratio in 2014 is 10.8, which means

that the company has almost 11 times as many quick assets than current liabilities. In the

span of 3-year, the amount of Current Assets increases significantly, nearly 8 times, so the

ratio climbs up as well.

3) Long term solvency :

Long term solvency ratios are intended to address the firm’s long term ability to meet its

obligations, or more generally, its leverage.

- Debt ratio: A solvency ratio that measures a firm's total liabilities as a percentage of its

total assets.

During the period, we receive a rather stable rate of debt ratio from Twitter (0.12; 0.35 in

2013, 2014 respectively), except for the year 2012 ( debt ratio was 1.29). For a company, a

lower ratio is more favorable than a higher ratio. The ratio of 1.29 in 2012 indicated that

Twitter's debts exceeds its total assets and the company have to sell all of its assets in order

to pay off its liabilities and in this year, Twitter was a highly leverage firm. Once its assets

are sold off, the business can no longer operate. The ratio in 2013 & 2014 are both less than

0.5, and it is considered as less leverage with an opportunity to borrow in the future at less

risk for the lenders of this firm.

- Debt-equity ratio: The debt to equity ratio is a financial, liquidity ratio that compares a

company's total debt to total equity. The debt to equity ratio shows the percentage of

company financing that comes from creditors and investors. A higher debt to equity ratio

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indicates that more creditor financing (bank loans) is used than investor financing

(shareholders).

Twitter in 2012 experienced a negative debt-equity ratio (-0.83), however, it was a good

news for the company. A lower debt to equity ratio usually implies a more financially stable

business. Companies with a higher debt to equity ratio are considered more risky to creditors

and investors than companies with a lower ratio. The ratio in 2014 (0.54), which is bigger

than 0.5, implied that there are more than half of many liabilities than there is equity.

- Equity multiplier: The equity multiplier is a financial leverage ratio that measures the

amount of a firm's assets that are financed by its shareholders by comparing total assets with

total shareholder's equity.

A higher ratio means that more assets were funding by debt than by equity. In this case, the

ratio in 2012 was the lowest, which implied that the company depended less on debt to

finance its assets than the next two years . From the balance sheet, the ratio in 2013 and 2014

are relatively high, which reveals that too much assets were funding by debt than by equity

and the firm is considered to be highly leveraged and more risky for investors and creditors.

4) Profitability:

Profitability Measures intend to measure how efficiently a firm uses its assets and manage its

operations

- Profit margin: The profit margin ratio, also called the return on sales ratio or gross profit

ratio, is a profitability ratio that measures the amount of net income earned with each dollar

of sales generated by comparing the net income and net sales of a company.

For all 3 years, profit margin ratio is negative, because of the result of net income from the

income statement. Profit margin of Twitter decreased significantly from 2012 to 2013 (from

-0.25 to 0.97), and then increased slightly in 2014, to finish at -0.410. Creditors and 14

investors use this ratio to measure how effectively a company can convert sales into net

income. Investors want to make sure profits are high enough to distribute dividends while

creditors want to make sure the company has enough profits to pay back its loans. An

extremely low profit margin would indicate the expenses are too high that makes the net

income negative Twitter's profit is not high enough to distribute dividends and to pay back

its loan.

- Return on assets ratio: The return on assets ratio, often called the return on total assets, is a

profitability ratio that measures the net income produced by total assets during a period by

comparing net income to the average total assets. Since company assets' sole purpose is to

generate revenues and produce profits, this ratio helps both management and investors see

how well the company can convert its investments in assets into profits.

Cash Flow

Cash flow statement is one of the most important reports. It consists of cash flow from

financing, operating and investing activities.

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Operating activities include the core business activities. One significant thing we can see in

Twitter’s cash flow statement is that the cash flow from operating activities rose

dramatically from only more than $1 million in 2013 to more than $81 million in 2014.

As can be seen from the CFS, operating cash flow is positive while net income is negative.

Because Cash Flow from Operating Activities = Net Income + Noncash Expense + Changes

in Working Capital, noncash items such as high Depreciation (more than $234 million) and

non cash transactions included in Adjustments to Net income result in positive operating

cash flow while the company did not actually pay in cash that year. Another factor is

Changes in Liabilities, the amount of money Twitter gets back from lending money to

others, was more than $140 million.

Growth companies spend heavily on investing activities and this figure was negative at more

than minus 1 billion thousand dollars for TWTR in 2 years continuously. Sometimes a

company might have a negative investing cash flow which may not be really bad if it is due

to investment expenses.

Financing activities include the cash that comes into a company in the form of loans or

interest earned or shareholders money, as well as the cash that goes out. Twitter spent more

than $600 million from financing activities for both 2013 and 2014. These numbers were

positive because of the money the company gets from borrowings or selling stock.

Twitter had a cash and cash equivalents of more than $630 million in 2013 and more than

$670 million in 2014 meaning the company is able to meet its expenditure and grow cash.

 

2014 2013 2012Operating cash flow -343,169 -530,972 -2,791

Net capital spending 438,842 260,272 199,716

Change in NWC 1,512,810 1,904,662 -103,737Free Cash Flow -2,294,821 -2,695,906 -98,770

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Free cash flow (FCF) represents the cash that a company is able to generate after laying out

the money required to maintain or expand its asset base. Free cash flow is important because

it allows a company to pursue opportunities that enhance shareholder value. Without cash,

it's tough to develop new products, make acquisitions, pay dividends and reduce debt.

The Free Cash Flow of the Twitter company was negative for both year, 2013 and 2014.

This was because of the negative operating cash flow, meaning the company was not doing

well on its own. It had to spend too much on operating itself.

Performance Evaluation

* SHORTERM- SOLVENCY: PAY DEBT SHORT TERM

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Current ratio: This means that companies with larger amounts of current assets will more

easily be able to pay off current liabilities when they become due without having to sell off

long-term, revenue generating assets.

The current ratio helps investors and creditors understand the liquidity of a company and

how easily that company will be able to pay off its current liabilities. This ratio expresses a

firm's current debt in terms of current assets. So a current ratio of 4 would mean that the

company has 4 times more current assets than current liabilities.

A higher current ratio is always more favorable than a lower current ratio because it shows

the company can more easily make current debt payments.

For Twitter, in the period of 2-year, from 2013 to 2014:

- CA increase 65.3%

- CL increases 74.6%  

- Current ratio decrease : 11,412,000 -> 10,800,000, but the company is still able to cover

its debt.

* LONG TERM DEBT PAYMENT: TOTAL DEBT

Debt ratio = TD/TA

2012 = 1.29, 2013 = 0.12, 2014 = 0.35

A lower ratio is more favorable. In the two years of 2013 and 2014 this ratio always

remained less than 0.5, which mean TD < TA -> the company has the ability to cover long

term debt.

We could also point out that for Twitter, 2014 is successful but still is not as effective as

2013.

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* NEGATIVE INCOME + ROE

It's possible for a business to have a negative net income or a financial loss if the company

has more debt obligations and operating expenses than revenue. A negative net income has a

large impact on ROE as investors likely lose money because the business has no cash left

over to pay them. Calculating ROE with negative net income simply plugs in a negative

number where a positive one would be in the formula. For example, a company with a

negative net income of $1,000,000 and a total shareholder equity of $2,000,000 has an ROE

of negative 50 percent. This means the company lost half of total shareholder equity for the

given year.

As of ROE itself, we’ve already known that it is a measure of how the stockholders fared

during the year. Normally for every company ROE should be positive. If it is negative then

that’s not a good thing, because that would mean for every dollar in equity, the company

would generate nothing in profit. Twitter had ROE of -0.21 and -0.15 in 2013 hay 2014,

respectively, so obviously they’re not doing well.

* PROFIT MARGIN:

Every company pays a great deal of attention to its profit margin. The higher the profit

margin is, the more profitable the company is and the better control it has over its cost. If the

profit margin is low, then the company needs to control expense more carefully. In the case

of Twitter, we can calculate that in the year of 2013 and 2014, the company only had the

negative profit margin of -0.97 and -0.41, respectively. This means that Twitter generated

less than -0.97 and -0.41 in profit for every dollar in sales. So basically Twitter will need to

cut off its expense to bring its profit back to the initially higher state.

** CONCLUSION: 

Base on these facts and stats, we could come to the conclusion that this Twitter

company is still able to pay debt but is facing some difficulties in making profit and

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paying for Equity. Right now Twitter is not profitability enough to pay money for its

owners (stockholders).

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