NEW YORK (TheStreet) -- Famed value investor Benjamin Graham taught that investors must conduct a thorough fundamental analysis of securities to determine their intrinsic value and risk. Here's the beginning of such an analysis on Facebook (FB - Get Report). (MG refers to "modern Graham.")

FB Chart

FB data by YCharts

Defensive Investor - must pass at least six of the following seven tests: Score = 2/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - ratio of current assets over current liabilities  greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using three-year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL (PEmg is a price-to-earnings ratio that uses a weighted average of earnings per share from the last five years.)
  7. Moderate Price to Assets - price-to-book ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least five years - PASS
  4. Dividend Record - currently pays a dividend - FAIL
  5. Earnings growth - EPSmg greater than five years ago - PASS

Valuation Summary

Key Data:

Recent Price $58.02
MG Value $21.30
MG Opinion Overvalued
Value Based on 3% Growth $8.02
Value Based on 0% Growth $4.70
Market Implied Growth Rate 48.18%
NCAV $4.59
PEmg 104.86
Current Ratio 13.56
PB Ratio 8.89

Balance Sheet - 3/31/2014

Current Assets $14,060,000,000
Current Liabilities $1,037,000,000
Total Debt $191,000,000
Total Assets $19,028,000,000
Intangible Assets $1,682,000,000
Total Liabilities $2,291,000,000
Outstanding Shares 2,564,000,000

Earnings Per Share

2014 (estimate) $1.01
2013 $0.59
2012 $0.01
2011 $0.29
2010 $0.28
2009 $0.10
2008 -$0.06

Earnings Per Share - ModernGraham

2014 (estimate) $0.55
2013 $0.30
2012 $0.15
2011 $0.18
2010 $0.11
2009 $0.02

Conclusion:

Facebook is suitable for the enterprising investor, but not for the defensive investor, because of the company's lack of dividends, short operating history, and high PEmg and price-to-book ratios.

The company appears overvalued because its earnings growth rate, based on an earnings estimate of 14 cents a share for this year, falls below the market's implied estimate of 48.18% earnings growth.

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At the time of publication, the author had no position the stock mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.