Understanding Facebook's Capital Structure (FB)

Facebook Inc. (NASDAQ: FB), the most dominant name in social media, has further strengthened its position after the company's initial public offering (IPO) in 2012. Additional capital raised from the IPO allowed Facebook to make timely investments in mobile initiatives to maintain its user base and keep marketers engaged. Rising advertising revenue has enabled more equity capital accumulation and resulted in reduced debt use for the company, and this in turn fueled sustained investor interest in the stock, prompting its shares to climb 228%, as of Aug. 19, 2016, since the stock's first trading day on May 21, 2012.

With revenue climbing to $17.9 billion in 2015 from only $5.1 billion in 2012, its IPO year, Facebook earned $3.7 billion in 2015, compared to a mere $53 million in 2012. Paying no dividends, the company gets to retain all of its earnings to help build up a solid equity capitalization base over time. Total retained earnings accumulation expanded to $9.8 billion by the end of 2015 from just $1.7 billion at the end of 2012. For well-capitalized companies, retained earnings must be a vital part of their total equity capitalization besides capital raised from share issuance. At the end of 2015, Facebook's accumulated retained earnings were about one-third of the company's stock capital, and the relative percentage of retained earnings over stock should increase further in the future when no substantial shares have to be issued for capital beyond what its internal earnings can already supply.

With a strong equity capitalization, the use of debt in Facebook's capital structure has become negligible over the years after its IPO. Total long-term debt was $1.99 billion at the end of 2012, the year of its IPO, and has since dropped to a couple of million dollars in capital lease obligations only. The company does not use short-term debt, given its strong revenue and cash positions. In 2013, the year following its IPO, Facebook retired nearly its entire long-term debt in the amount of $1.89 billion, supposedly using some of the capital raised from the IPO, and left only about $100 million in the debt balance. Since the end of 2012 and through the end of June 30, 2016, Facebook has not issued any debt again.

Even with little support from debt use, Facebook's investing activities remained active in its post-IPO years, mainly in capital expenditures and acquisition of business. The company's annual capital expenditures ranged between $1.4 billion and $2.5 billion from 2013 to 2015, such as necessary investments in network infrastructure to carry out its enormous internet operation of the Facebook website. Spending in acquisition of business reached almost $5 billion in 2014, in addition to stock issued for deal purposes. The year's notable purchases included buying mobile instant messaging company WhatsApp for $19 billion and virtual reality technology company Oculus VR for $2 billion, both in cash and stock. As popular as its namesake social media site is, Facebook may better thrive on the ever-changing internet technology through renewed acquisitions of emerging innovations and the talents behind them.

With all of the capital, equity and debt put into work, enterprise value looks at the worth of the assets financed by the capital. Facebook's total assets grew to $49.4 billion by the end of 2015 from $6.3 billion at the end of 2011, thanks largely to the stock capital raised from its IPO and in no small part to earnings accumulated and retained over the years. With very little debt use, Facebook's increasing enterprise value reflects the mostly positive market valuation of the company's equity capital, or its market capitalization. From the end of its 2012 IPO year to the end of Q2 2016, Facebook's market capitalization ballooned from $90.7 billion to $328 billion, a mega-cap designation. Its future enterprise value is likely to rely heavily on continued premium market capitalization.