Bulrich

Chapter 4 – Wall Street Journal Article “LinkedIn Profit Soars as Site Caters to Corporate Recruiters, Adds Members”

Wall Street Journal 2/7/13

by Evelyn M. Rusli http://online.wsj.com/article/SB10001424127887323452204578290392677757364.html?mod=WSJ_ear

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Chapter four expands on the basic concepts of financial statements and shows its readers how to use them to evaluate the performance of companies, both internally and against competitors, even though there are limitations to financial statements. The chapter begins by giving the reader three perspectives – that of stockholders, managers, and creditors - that help them understand the values of different financial statements and performance evaluation techniques available to them. Each perspective is concerned with cash flows, but they all have different short- and long-term desires. Internally, each of them uses common-size financial statements in order to evaluate different elements of the business’ performance from one period to the next, or in comparison to peer firms. Another tool used is a financial ratio; this tool helps to more accurately understand how a firm compares to other firms of different sizes. Financial ratios can help to measure a firm’s liquidity, efficiency, leverage, profitability, and market value; these ratios are very important to stakeholders in order to understand the health of the company. A specific tool, called the DuPont system, uses some of these financial ratios to determine the financial strength of a firm. Many different types of benchmarks may be used, as well, to gauge the performance of a company through its financial statements. However, even though all these tools exist, one must be careful when using them: due to a lack of theory relating to these tools they can be unreliable. It takes experience and knowledge to understand when to use a particular tool and how it must be adjusted to accurately reflect a particular company’s health.

The Wall Street Journal article details the increased profit enjoyed by LinkedIn Corp. based on year-over-year gains indicated by their financial statements, though there are still concerns for the company. Ms. Rusli indicates that LinkedIn’s profit increased by 66%, sales increased by 81%, and, in response to the positive news, their stock prices rose almost ten percent on the day of the article. Analysts had predicted much more meager gains prior to the announcement. The article details some of the newer services responsible for the dramatic increase in revenue. These services include: more content, features that mimic those on other social networking sites, and built-in features that attract more prominent users. These added features also grew general ad sales. The article does voice concern regarding low user increases. The article finishes by giving specific earnings information for their fourth period ending this year and the one from the year before:

Metric 2013 2012 Profit $11.5 million $6.9 million Earnings per share $0.35 $0.12 Revenue $303.6 million $167.7 million

These metrics show a very upbeat picture of LinkedIn’s year-over-year growth. Using financial statements to evaluate the performance of a company like LinkedIn is very

useful. For instance, one can compute the increase in profit by subtracting 2012’s profit for the fourth

period from 2013’s profit for the same period, then dividing it by 2012’s profit. This gives us a 66.67% increase, as stated in the article. We can do the same for sales, and we get the same 81%. However, using common-sized reporting we can find another worrying trend in the data. We can take the sales-to- profit ratio for each period by dividing that period’s sales by that period’s profit. This gives us $24.30 sales per dollar of profit for 2012, yet it was $26.40 sales per dollar of profit for 2013. This may indicate diseconomies of scale; more sales may reduce the profit ratio. There is more data needed to confirm this suspicion, but it is not a positive trend when taken by itself. Overall, however, it does seem that LinkedIn is doing well.