The Motley Fool: Reading Facebook

The Motley Fool Take

Facebook (Nasdaq: FB) has been outperforming Wall Street analyst expectations for revenue and earnings during the past few years, and analysts expect the company to grow its earnings by about 35 percent annually over the next five years. It’s not unthinkable, as the social network has grown earnings by an average of 69 percent a year over the last five years, while sales have increased by 55 percent annually. That’s impressive!

Many of Facebook’s numbers are staggering. It boasts more than a billion daily active users around the world. It has been quite successful at monetizing its heavy traffic, as its annual revenue of more than $20 billion attests. Its net profit margin topping 30 percent is also impressive.

Facebook is getting better at milking more ad revenue out of its users. Advertisers are seeing the social hub as crucial to their marketing campaigns, and they’re paying more to use it. In its last quarter, monthly active users may have risen by a modest 15 percent over the past year, but Facebook’s ad revenue soared 63 percent.

Facebook’s stock doesn’t look like a bargain, with its price-to-earnings (P/E) ratio recently near 61, but rapid growers tend to have steep P/E ratios. Its growth is likely to slow as it gets more immense, but the stock is poised to reward patient risk-tolerant believers. (The Motley Fool owns shares of and has recommended Facebook.)

Ask the Fool

Q: How can I find out what inflation’s effect has been over time? - T.W., Strasburg, Virginia

A: Try the handy inflation calculator at westegg.com/inflation. It can show you, for example, that something that cost $100 in 2000 would cost $139 in 2015.

To learn the average inflation rate over a period, visit measuringworth.com/inflation. (Between 1980 and 2015, for example, it averaged 3.07 percent annually in the U.S.) That site also shows the inflation rate for specific years. Inflation averaged less than 1 percent in 2015 - but topped 13 percent in 1980!

Q: What’s a “payout ratio”? - G.N., Biloxi, Mississippi

A: It’s the percentage of a company’s earnings (net income) that’s paid out to shareholders as a dividend. For example, McDonald’s trailing earnings per share (EPS) was recently $5.24, and its annual dividend was $3.76 ($0.94 per quarter). Divide $3.76 by $5.24, and you’ll get 0.72, or a payout ratio of 72 percent.

A payout ratio above 100 reflects a company paying out more than it’s earning, which is not sustainable over the long run. (A single bad year can give a company a temporarily high payout ratio, though.) Companies with high payout ratios often have little flexibility regarding what they can do with their cash. That can be OK for big, established companies that don’t need to reinvest much in their businesses. Reinvested earnings can sometimes return less than shareholders could get investing the payout on their own.

Consider a very steep payout ratio a red flag, as the company may have to reduce its dividends. Low payout ratios suggest lots of room for dividend increases. To see our recommended dividend-paying stocks, try our “Motley Fool Income Investor” newsletter for free (at fool.com/shop/newsletters).

My Dumbest Investment

My dumbest investment was investing in gold after I left the Navy. I did so through a company that charged me storage and handling fees that ended up offsetting my price gains. - M.S., online

The Fool responds: Many people like investing in gold, seeing it as a defensive move against possible economic downturns and a good way to diversify a portfolio.

Gold is generally far from a great investment, though. As finance professor Jeremy Siegel has shown in his book “Stocks for the Long Run” (McGraw-Hill, $40), between 1802 and 2012, a dollar invested in gold would have grown to $4.52 (adjusted for inflation). It would have grown to $281 in Treasury bills, $1,788 in bonds and $704,997 in stocks.

Over shorter periods, of course, gold can soar. About a decade ago it was around $600 per ounce, and it recently topped $1,200. But in 2011, an ounce went for more than $1,900. Gold can be more volatile than safe.

If you’re set on investing in gold, perhaps limit it to a small portion of your portfolio. You can invest in it in several ways — such as buying actual gold (which you’ll need to safely store), investing in gold-mining companies or opting for mutual funds focused on gold.

Remember that portfolios also can be diversified by holding domestic and foreign stocks, bonds and real estate investments. You can do well without gold.