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Should we trust in the Meta Platforms quality despite the poor earnings announcement?

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·4-min read
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Weaker than expected revenues and profits were a reported one-off for advertising giant Alphabet (NSQ: GOOGL) when it reported disappointing financial results yesterday alongside an upbeat outlook. That's not the case for Meta Platforms (NSQ:META), for whom economic turmoil (which has caused many companies to slash their advertising budgets this year) looks likely to continue to hurt revenues for the remainder of the year. The company has also been hurt by Apple's (NSQ: AAPL) tighter data privacy, which means Facebook can't track users' data on iPhones. Quarterly revenue of $28.8bn was 1% lower than the same period last year and some way short of consensus analyst expectations.

These results probably won't come as a shock to investors, who have sent Meta's share price down more than 50% in the last year. Not that long ago, Meta's market capitalisation was knocking on the door of $1trn. Now it's down at $400bn and the shares are trading on 12.6 times forecast earnings. Could now be a good moment to take a closer look at this historically high quality operator?


High quality companies don't rely on debt

With its strong cash-generation, consistent profits, high rates of return on investment and wide margins, Meta has many of the hallmarks of a high quality company. Indeed, in the last twelve months Meta Platforms reported a free cash flow to sales ratio of 33.2%.

But profitability and cash flow metrics alone do not tell the full story, especially when a company is in a state of flux. To assess Meta Platforms's true quality, we should also look at the health of its balance sheet.

First, we should assess the company's immediately available sources of cash - its liquidity. At its last financial results, Meta Platforms had $43.9bn of cash and short term investments on its balance sheet and its current ratio (current assets over current liabilities) was 2.81. Higher current ratios mean the company's current assets comfortably cover its current liabilities. Another useful metric is the cash conversion cycle, which showcases how long the company takes to turn capital invested for operations into cash flow. At the last set of financial results Meta Platforms's cash conversion cycle was -12.1 - negative cash conversion cycles are indicative of companies which can sell their inventory before they have to pay for it, which is a common benefit of subscription or software businesses.

The longer term financial position is called the company's solvency. Meta Platforms reported long-term debt of $524m at its last set of financial results and a net cash position of $43.3bn.

With robust financial health is Meta Platforms a quality company?

Stockopedia has built its Quality Rank to quickly show investors how well every stock in the market stacks up according to three criteria.

  1. Is the company a stable, growing, cashflow generative business with high returns?

  2. In which direction are the company's fundamentals headed

  3. Is there a risk to your capital in investing in this company?

Meta Platforms has a Quality Rank of 94. This puts it in the top 20% of the stock market in terms of quality characteristics. This is showcased by profitability metrics including a five year average return on capital employed (ROCE) of 25.6%, which is a good sign as it shows the company is efficiently generating profits from its immediately available assets. Other interesting profitability metrics include:

  • Return on assets (ROA). A company's ability to generate profits from the assets on its balance sheet. In five years, Meta Platforms's ROA has averaged 21.8%.

  • Return on invested capital (ROIC). Arguably the most interesting profitability metric as ROIC showcases the amount of profits generated from the investments made by all stakeholders in the company. It is useful to compare to ROIC with cash return on invested capital (CROIC) to show how efficiently the company is converting its profits into cash flow. Last year Meta Platforms generated an ROIC 34.9% and a CROIC of 38.1%.

High quality stocks are desirable investments but they often come at a premium - so checking Meta Platforms's Value Rank might be an appropriate next step to understand whether the time is ripe to add the company to your portfolio.


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