Analyze and compare AT&T and Facebook

AT&T Inc. (T) is a leading global provider of telecommunication services. Facebook, Inc. (FB) is a major worldwide social media company. AT&T has a lengthy history and was founded by Alexander Graham Bell. Facebook has a short history and was founded by Mark Zuckerberg. Facebook uses telecommunication networks, like those of AT&T, to deliver social content to its users. Free cash flow and revenue information for both companies for three recent years is as follows (in millions):

AT&T

Information from the statement of cash flows:

	Year 3	Year 2	Year 1
Cash flows from operating activities	$ 39,344	$ 35,880	$ 31,338
Cash used to purchase property, plant, and equipment	(22,408)	(20,015)	(21,433)

Information from the income statement:

	Year 3	Year 2	Year 1
Revenue	$163,786	$146,801	$132,447

Facebook

Information from the statement of cash flows:

	Year 3	Year 2	Year 1
Cash flows from operating activities	$ 16,108	$ 10,320	$ 7,326
Cash used to purchase property, plant, and equipment	(4,491)	(2,523)	(1,831)

Information from the income statement:

	Year 3	Year 2	Year 1
Revenue	$27,638	$17,928	$12,466

a. Using total revenue, which company appears to be the larger at the end of Year 3?

AT&T

b. Using total revenue, which company appears to be growing faster across the three years?

Facebook

c. Compute the cash used to purchase property, plant, and equipment (PP&E) as a percent of the cash flows from operating activities for all three years for each company. Round to the nearest whole percent.

	Year 3	Year 2	Year 1
AT&T	fill in the blank 3%	fill in the blank 4%	fill in the blank 5%
Facebook	fill in the blank 6%	fill in the blank 7%	fill in the blank 8%

d. Using the computations in (c), which company appears to require more cash to purchase PP&E, and what impact does this have on free cash flow?

The data indicate that AT&T requires more cash to purchase PP&E than does Facebook . In Year 1, the percent of cash flows from operations that is used to purchase PP&E is almost three times that of Facebook . In Years 2 and 3, the percent of cash flows from operations that is used to purchase PP&E is more than double that of Facebook . The net impact of cash used to purchase PP&E on free cash flow is more negative for AT&T than it is for Facebook . This is because cash used to purchase PP&E is subtracted from cash flows from operating activities in determining free cash flow.

e. Compute the ratio of free cash flow to revenue for all three years for each company. Round percentages to one decimal place.

AT&T

	Year 3	Year 2	Year 1
Ratio of free cash flow to revenues	fill in the blank 15%	fill in the blank 16%	fill in the blank 17%

Facebook

	Year 3	Year 2	Year 1
Ratio of free cash flow to revenues	fill in the blank 18%	fill in the blank 19%	fill in the blank 20%

f. Interpret the chart.

Facebook appears to have a better free cash flow position than does AT&T . In Year 1, Facebook ratio of free cash flow to revenues is almost six times greater than AT&Ts . In Years 2 and 3, the difference is smaller; however, Facebook ratio of free cash flow to revenues is still more than four times greater than AT&Ts . Across the years, the ratio of free cash flow to revenues has remained relatively stable for both companies. Over this time, both companies have increased cash flows from operating activities and increased the cash needed to purchase PP&E. However, for Facebook , the increase in cash needed to purchase PP&E has increased more than the growth in cash flows from operating activities. This has caused the decline in the ratio of free cash flow to revenue in Years 2 and 3.