Facebook worth 128 times its profits? That's beyond optimistic – it's euphoric | Technology | theguardian.com

Facebook worth 128 times its profits? That's beyond optimistic – it's euphoric | Technology | theguardian.com: "After so many years of economic gloom, it’s nice to have some good news. On Thursday, such tidings came in the form of a surge in the valuation of Facebook, which climbed to more than $192bn in the wake of good first-quarter earnings.

This means that, as of Friday morning, the social network is now worth more, at least on paper, than Toyota ($189bn), AT&T ($184bn), Coca-Cola ($180bn), Disney ($150bn) and even Bank of America ($164bn).

How could that have happened?

Valuing a company

The total value of a publicly-listed company is pretty easy to work out: you just take its share price, and multiply it by the number of shares it has issued. That tells you what investors think its worth – it’s the price where buyers and sellers equal out.

What a company “should” be worth is a little tricker. For private companies, say a small family-run grocery store, the convention is, roughly speaking, that a business is worth some multiple of how much profit (or sometimes just cash) it generates.

So for a shop that does steady trade over time, a fair price might be about five years’ worth of profits. If the business can show it’s been growing rapidly each year, and is making more and more money, we might decide seven or eight years’ profit is fairer. There’s no exact science."



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