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Alan Kring Productions and Association with Emergent Light Studio presents

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the Illinois State Collegiate Compendium, academic lectures in business and economics.

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This is Business Finance, FIL 190 for spring semester 2024.

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Today, Financial Statement Analysis.

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And this will go to some good degree toward your construction of a chat GPT.

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Because the technical part of the analysis is just grinded out arithmetic calculations

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and a little bit of algebra along the way.

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And it is just wonderful bait for a chat GPT to crank those out for you.

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Of course, Excel can do it too.

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But also, even in the ratio analysis, where you take one number in the account of the statement

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divided by another, it can help you make observations about, if you construct it properly,

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it can even help you make observations about changes, what the ratio is compared to the industry standard,

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and what the trend in it tells about the company.

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Now, the one thing that you will find is that you still have a brain.

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And that means that when you get one of these GPTs, especially, to do an analysis for you,

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you can do a lot better than a GPT.

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Now, understand that I've said this before.

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Chat GPTs are the hillbillies of artificial intelligence.

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They are the low level, the narrow AI.

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Now, the broad AI we've got right now, and it can do a lot more,

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but it takes insane computing power, which we have to a certain extent.

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And then, unfortunately, about 20 to 50 years down the road, we get to general AI,

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the connected planet, the connected solar system, as it were.

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So then it will probably be able to whip our butts really good at any kind of analysis at all.

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But even the broads are pretty good.

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But when you're in a chat GPT, it's going to do pretty good on analyzing,

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but you can add to it, or maybe even do better.

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So keep in mind that when I'm going through today and on Wednesday,

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the fundamental analysis and the technical analysis.

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But before we go to that, we're going to have a look at the numbers right here today.

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And just as a look at them, it's kind of a mess, but what would you say?

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Is this a bull day or a bear day?

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Sorry, bear.

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I was going to say, wait, what?

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Let me focus on it.

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I've got cataracts, but they're not that bad now.

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That's cool. You're good.

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But I mean, of course, it's not a spectacularly bad day,

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but it is a little bit on the spooky side.

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You see this drop off.

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This is a cliff, but it looks like it's leveled off, at least for a while.

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It's mostly from what I can read.

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I had a quick conference call with a couple of traders this morning

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who were former students of mine.

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It was about other things, but they didn't see anything

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that would really spook the markets like this.

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It's more like a correction kind of environment.

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There's all this giddiness.

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Let me show you something here real quick.

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Remember I talked about volatility, vol.

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Now, here's something that is worth,

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and sometimes Yahoo keeps this on their summary board, but not today.

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The volatility index.

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Well, actually, I wonder which one I...

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I could look at that one.

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Oh, hello kitty.

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Okay, that one's a little scary.

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This is a volatility index, CBOE, Chicago Board of Options Exchange.

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And remember, volatility represents risk.

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It is uncertainty.

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There's more volatility if there is disagreement on where things are going,

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and things here means the markets.

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And as you can see, it's up rather seriously right now, the CBOE volatility index.

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So that tells us that...

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Notice here, look here.

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Really quick.

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Now, you're saying, wait a minute, fat boy, this thing is 3 a.m.?

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Oh, yeah, this is an options exchange, so it doesn't trade in the same way

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that you're opening bell, closing bell during regular working hours.

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Notice how it just started to plunge, rose, flatten, everyone kind of dusting themselves off.

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Then it dropped off a freaking cliff.

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Volatility index going down, and now we've got a spike from hell going on.

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Now, the volatility has volatility, and when you have the volatility having volatility,

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that's a lot of volatility.

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So that tells you right now there is uncertainty.

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It's not any one thing that's scaring the markets.

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It's which way are we going kind of volatility, kind of uncertainty.

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And that will depress prices of securities.

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Stocks will get really spooked in a market where there is volatility.

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Higher risk, generally inequities in stocks, common stocks, means that the price goes down.

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And you'll see why that relationship is there as the course proceeds.

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It has to do with the uncertainty that embeds in interest rates.

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And when interest rates go up, prices go down.

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So that's the driving force.

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Uncertainty risk is articulated into the economy, into the markets, through interest rates.

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And when interest rates go up, that in general will bring securities prices down.

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Why? Because the net present value of future expected cash flows goes down.

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We'll see all this as the course goes along.

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And I put these out there, not so that you can remember right now,

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and say, oh, God, I've got to remember that, write it down, memorize it.

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No. I keep talking about it.

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And it gets inside your skin and gets into your blood.

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And that's when you are becoming a professional in finance,

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whether it's investments, corporate, real estate, entertainment finance, financial planning, whatever.

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Now, let's go back to the main board there.

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Now, that thing has freaked me.

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Now, notice here that remember what I told you about flight to quality.

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Flight to quality is when investors are moving in herd from riskier investments to safer investments.

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And that would mean here that we have what looks like maybe a flight to quality.

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Investors are getting out of stocks.

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Selling the stocks, supply of stocks goes up in the market maker's book.

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Prices drop, so the market makers can get rid of the inventory.

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So what we would say is, OK, if investors are getting out of stocks,

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then they probably are going and buying bonds.

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So that would increase the demand for bonds, driving the prices up and the yields down.

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Let's run over here and see if that's what's going on today.

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Yields are going up, so the prices are going down.

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So where the frick is the money going?

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It went from stocks and it certainly didn't go to bonds because bond prices are dropping.

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So, OK, from stocks to bonds, stage one, flight to quality.

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From bonds to gold.

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Well, spank me Jesus, that's going down too.

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So where is that money going?

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No, it's not going to bullets.

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From stocks to bonds, bonds to gold, gold to bullets.

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Where is that money going?

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If they're bailing out of stocks, they're bailing out of bonds,

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they're bailing out of the metals, where is it going?

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What do you say?

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It's OK, it's OK.

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Try to think.

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This is your first course in finance.

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What do you say? Where is it going?

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Let me ask you this, do you go to sleep at night?

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I do.

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Where do you go to sleep?

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In my bed.

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What is on your bed that you sleep on?

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A blanket, pillow, mattress.

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Mattress!

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Oh, that's right.

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It's going under the mattress.

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It's going to cash.

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It's going to cash.

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That's where it's going.

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They're in the money markets, into the money market funds.

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They're parking it, waiting to see what the hell is about to happen.

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You see, they want liquidity.

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Cash is highly liquid, of course, obviously.

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So they want the liquidity and they want to hold it in some things

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that they can get back in quickly.

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Because right now, there's a lot of volatility.

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There's a lot of uncertainty.

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And so, you wait for a clearing.

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You wait for, as we used to say in the service, you wait for your shot,

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your patient.

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You just get it away and then in a safe place under the mattress,

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you turn it to cash, money market, and other such securities,

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other such instruments, and then when the time is right,

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you can jump back in very quickly.

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That's the scenario that's picking up right now.

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It's nothing to be scared about, but it's...

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Now, if investors were really, really concerned,

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they'd be moving into bonds, but they're not.

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If they were really, really concerned,

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they'd be moving into gold or to other metals.

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They're not.

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So that would tend to mean that they are not long-term bear.

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They're just short-term, get the hell out of the way of the tornado

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that's coming through, and then have it someplace where you can pull it

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right back out and get back into the game.

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That's how you would think about this.

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Now, am I right?

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We'll see.

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I'm usually right.

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I'm right more than I'm wrong, but boy, when I'm wrong,

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I am spectacularly good at being wrong.

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Coming back over here real quick.

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Let's have a gander at a few other things here.

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Oil.

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Look at that.

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Oil is dropping.

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It's gone below the 72-79 band.

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Now, is it going to stay there?

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It seemed to like to find that again, but for right now, oil has gone down.

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It was up as far as 77, a barrel on the light-suite Brent, Brent light-suite,

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and now it's gone clear down to below 72.

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So there's some vol in that market right now, in the oil market,

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but it's mostly on the downside.

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The high seas are flush with oil.

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The ports are open that can take the tankers, even the VLCCs,

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the very large dirties, and they call them dirties because once it's used for oil,

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it's dirty.

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It can't be used for other things.

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So the very large, those ginormous things that look like small cities floating

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around in the ocean, they're full of oil.

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The supply chain is flush.

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So it's a good time, and you might even see the price of gasoline go down a little bit,

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a notch, down around here maybe to $2.99, $2.95 a gallon up in Chicago.

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It'll make it below $10 a gallon.

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That's a joke, but anyway, okay, to hell with that.

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Why don't we go over here, have a look.

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Now, notice that Tokyo was wavy, and it wasn't a spectacularly positive day.

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It was up a half a percent, nothing to sneeze at.

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Apparently, there wasn't any kind of worry late last night.

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But then today, when you get over to London, it started out kind of volatile.

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London has been volatile for some time now.

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It just seems to have more bounce up and down.

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But it finished just a notch down.

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Do you see how the concern was beginning right about there,

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and it started a pretty strong, deliberate trend downward and ended the day

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just a tiny bit below where it started the day.

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And then the sun was, it's still, I believe they're still trading over there right now.

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It's near the end of the day.

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But do you see how whatever started over there with concerns really got underway over here?

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And you can see that this is not just a United States thing.

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Apparently, there is a concern going across the globe right now.

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It wasn't there last night in Tokyo.

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You can't see evidence of it.

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But you do see the evidence happening about midday over in London.

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And it's continuing over there.

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And when the sun rose here, it just, that same concern carried itself with the sun rising here.

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That's about all I can say about it.

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Now, I'll show you what happened.

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On Friday, I decided, okay, I'm going to take a position in options.

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And I'll teach you a little about options as the course goes along and other derivatives.

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It's a bet on prices going up or down, above or below a specific price.

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And I decided I'm going to go PLTR on Friday.

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Unfortunately, my trade didn't get executed before the closing bell.

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So the order was open this morning to grab it at 91 cents a share.

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And unfortunately, it was, that didn't work out.

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It was spiked and I had just canceled out.

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Okay.

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So the next thing I decided to do, Micron Technologies.

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Spiked up at the beginning and then it started dropping off.

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And I am, that order executed.

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And now, you see that right there?

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That's my ass and I'm losing it.

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Okay.

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I mean, if I lose like this one for the day, what I'm hoping, look, the problem is here.

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Do you see the descending tops?

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You see the descending bottoms?

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Yeah.

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That's, it's headed for a place called hell.

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And so I'm going to lose my butt on this one.

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I might have, see if I can get the traders to sign, autograph the boot print on my butt at the end of today.

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But anyway, okay.

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One more, just one of my favorites, just having fun.

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Oh, well, spank me.

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Jesus, look at that.

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It's going down even more.

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They recall what?

243
00:16:45,000 --> 00:16:50,000
Two million Teslas and it's just taking a beating.

244
00:16:50,000 --> 00:16:59,000
And the mark, like I said, looked for somewhere between 90 and 80 as the floor for it.

245
00:16:59,000 --> 00:17:02,000
So if you wanted to buy a put, this is a put.

246
00:17:02,000 --> 00:17:07,000
You bet against the stock, against the specie, at a certain price.

247
00:17:07,000 --> 00:17:13,000
If it goes below that price, the farther it goes below it, the more you make and it's magnified by 100.

248
00:17:13,000 --> 00:17:20,000
For every dollar it goes down, it's, well, it depends on the delta and all that.

249
00:17:20,000 --> 00:17:26,000
But anyway, so you can see that that one's not good.

250
00:17:26,000 --> 00:17:34,000
Looking at a couple of other winners, Alphabet, Up.

251
00:17:34,000 --> 00:17:38,000
Of course, they own the universe, so obviously it'll go up.

252
00:17:38,000 --> 00:17:49,000
Oh, look at Google, slightly riskier than the market, a little undervalued, darn, darn nice EPS.

253
00:17:49,000 --> 00:17:52,000
It's profitable, but they don't pay a dividend.

254
00:17:52,000 --> 00:17:55,000
So you have to hope that the stock price will go up.

255
00:17:55,000 --> 00:18:02,000
So a holding period return comprises two separate things.

256
00:18:02,000 --> 00:18:05,000
One is the price going up, that's the capital gain.

257
00:18:05,000 --> 00:18:09,000
The other is the dividend you get, that's the dividend yield.

258
00:18:09,000 --> 00:18:13,000
You put those together and you get the total holding period return.

259
00:18:13,000 --> 00:18:21,000
In this case, the total holding period return hinges on only one of those pillars because there is no dividend.

260
00:18:21,000 --> 00:18:26,000
The only thing you'll make money on is the stock price going up if it's going to go up.

261
00:18:26,000 --> 00:18:32,000
And there's no dividend to buffer the stock going down from where you invested it.

262
00:18:32,000 --> 00:18:40,000
Another one, AAPL.

263
00:18:40,000 --> 00:18:42,000
Up.

264
00:18:42,000 --> 00:18:53,000
So it's not totally bad in the market, but when you have stocks going up in a down market, that's kind of noticeable, that's impressive.

265
00:18:53,000 --> 00:19:00,000
And so we have a couple here, and AAPL, if I'm not mistaken, AAPL is I think a little higher risk, isn't it?

266
00:19:00,000 --> 00:19:01,000
Yes, it is.

267
00:19:01,000 --> 00:19:02,000
1.31.

268
00:19:02,000 --> 00:19:04,000
So it's a risky investment.

269
00:19:04,000 --> 00:19:06,000
It's not really undervalued.

270
00:19:06,000 --> 00:19:09,000
That's close to 30.

271
00:19:09,000 --> 00:19:14,000
So I don't foresee it, but notice you do have a kind of a little dividend on it.

272
00:19:14,000 --> 00:19:15,000
It's a lousy dividend.

273
00:19:15,000 --> 00:19:21,000
It's only a half percent on the price right now, 186.94.

274
00:19:21,000 --> 00:19:22,000
But it's there.

275
00:19:22,000 --> 00:19:28,000
You get a little bit, even if AAPL hits the skids, you got a little bit there.

276
00:19:28,000 --> 00:19:32,000
But notice, look at that volatility.

277
00:19:32,000 --> 00:19:36,000
That's that vol you saw in the CBOE index.

278
00:19:36,000 --> 00:19:38,000
It's just a volatile stock.

279
00:19:38,000 --> 00:19:44,000
And again, I just keep saying these things over and over again, and it kind of begins to sink in.

280
00:19:44,000 --> 00:19:48,000
By the end of this semester, you'll be darn worthy traders.

281
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Talk the big talk and set up in Chicago at the Cudoba right there in the financial district,

282
00:19:53,000 --> 00:19:57,000
and people will think you're just one of the crowd.

283
00:19:57,000 --> 00:19:58,000
Maybe not.

284
00:19:58,000 --> 00:20:00,000
That kind of stuck up up there.

285
00:20:00,000 --> 00:20:02,000
But anyway.

286
00:20:02,000 --> 00:20:05,000
Now let me get down to the business of today.

287
00:20:05,000 --> 00:20:13,000
And the first thing that I will show you, and again, I'm repeating a little bit of what I said in the last lecture.

288
00:20:13,000 --> 00:20:21,000
This should have been shown to you in Business 100, if you were here as freshmen.

289
00:20:21,000 --> 00:20:29,000
However, most of the teachers are not finance, so they don't really emphasize this.

290
00:20:29,000 --> 00:20:36,000
But what I'm going to show you is where you get the primary documents on financial information.

291
00:20:36,000 --> 00:20:51,000
Any other place that you would get them would almost certainly have drawn its information from the documents I'm going to show you.

292
00:20:51,000 --> 00:21:00,000
And so when you are doing term papers, research papers, this is where your first go-to, no matter what.

293
00:21:00,000 --> 00:21:06,000
Not news sources, not Yahoo.

294
00:21:06,000 --> 00:21:09,000
See, you can get the financials here on Yahoo.

295
00:21:09,000 --> 00:21:12,000
You can get them on Google's finance.google.com.

296
00:21:12,000 --> 00:21:18,000
You can get them there, but all they're doing is pulling them from where I'm going to show you they start.

297
00:21:18,000 --> 00:21:23,000
And that's important because in some of these, as I mentioned I think in the last lecture,

298
00:21:23,000 --> 00:21:30,000
sometimes their systems glitch and they don't get a feed, so a number is missing.

299
00:21:30,000 --> 00:21:40,000
Or it could be there, but it's not the right number because the system didn't update that particular number in the financial statements.

300
00:21:40,000 --> 00:21:50,000
But if you go to the SEC, those numbers are where the companies file their financial statements and a whole lot more.

301
00:21:50,000 --> 00:21:54,000
And I'm going to talk about that a little bit here before we go into those.

302
00:21:54,000 --> 00:22:03,000
But know this, these are available 24-7 to anyone in the world who wants to go to the SEC site.

303
00:22:03,000 --> 00:22:06,000
They use a system called EDGAR.

304
00:22:06,000 --> 00:22:13,000
Now, when I started consulting many, many, many years ago, there were not a lot of people who had computers.

305
00:22:13,000 --> 00:22:19,000
Certainly the government had computers, but they were not in general use.

306
00:22:19,000 --> 00:22:26,000
So back in that time, we filed information documents in triplicate.

307
00:22:26,000 --> 00:22:30,000
We mailed them in. We prepared them and mailed them in.

308
00:22:30,000 --> 00:22:35,000
Where I had an EDGAR was that I was a computer nerd.

309
00:22:35,000 --> 00:22:41,000
And so I knew how to use, there was a spreadsheet that was very popular at the time called Lotus 123.

310
00:22:41,000 --> 00:22:46,000
And I used that and I used word processors.

311
00:22:46,000 --> 00:22:50,000
The big one back then was called WordPerfect. It was awesome.

312
00:22:50,000 --> 00:22:55,000
Word sucks compared to what that thing could have been if Microsoft hadn't wiped it out.

313
00:22:55,000 --> 00:22:58,000
But anyway, we filed them that way.

314
00:22:58,000 --> 00:23:05,000
Then it was in late 1980s, I believe.

315
00:23:05,000 --> 00:23:15,000
The SEC began a pilot program where public companies could file their documents electronically.

316
00:23:15,000 --> 00:23:25,000
There was not the internet that you know back then, but there were intranets and internets in that time period.

317
00:23:25,000 --> 00:23:29,000
They were just all text on a black screen and all that.

318
00:23:29,000 --> 00:23:35,000
But the SEC set up a program called EDGAR.

319
00:23:35,000 --> 00:23:39,000
And you could send the data through that.

320
00:23:39,000 --> 00:23:46,000
You set it up with these tags that were called SGML, Standard Generalized Markup Language,

321
00:23:46,000 --> 00:23:51,000
which eventually became HTML, which was the basis of webpages.

322
00:23:51,000 --> 00:23:55,000
But you'd have title, company name, slash title.

323
00:23:55,000 --> 00:23:59,000
And then you'd go all through it and then you could push a button and file it.

324
00:23:59,000 --> 00:24:04,000
And once you got the hang of it, once I got a boilerplate, I got it set up.

325
00:24:04,000 --> 00:24:09,000
It was so much easier than doing them on paper and all that kind of stuff.

326
00:24:09,000 --> 00:24:16,000
That became the EDGAR system, which is now the only way the companies can file.

327
00:24:16,000 --> 00:24:19,000
I did it with EDGAR and I made decent money.

328
00:24:19,000 --> 00:24:24,000
Companies would pay me to do this until the SEC finally cracked down on,

329
00:24:24,000 --> 00:24:30,000
because the big accounting firms got involved in it, they said,

330
00:24:30,000 --> 00:24:35,000
you've got to ban these small time players, so the SEC, going with the big dogs,

331
00:24:35,000 --> 00:24:41,000
actually made it illegal for me to file EDGAR statements after a certain period of time.

332
00:24:41,000 --> 00:24:43,000
So they can bite me.

333
00:24:43,000 --> 00:24:49,000
But anyway, let me show you this.

334
00:24:49,000 --> 00:24:53,000
SEC.gov.

335
00:24:53,000 --> 00:24:58,000
It was a long period of time when I was a little reticent to go to this site.

336
00:24:58,000 --> 00:25:07,000
Now, you go to filings, company filing search.

337
00:25:07,000 --> 00:25:13,000
Now, you could type in a company name, but that can be a little bit perilous,

338
00:25:13,000 --> 00:25:18,000
because you could have more than one company that has that name.

339
00:25:18,000 --> 00:25:19,000
Watch this.

340
00:25:19,000 --> 00:25:24,000
Suppose if I type in Sears.

341
00:25:24,000 --> 00:25:26,000
Okay.

342
00:25:26,000 --> 00:25:27,000
There are a lot of them.

343
00:25:27,000 --> 00:25:30,000
It's better if you type in a trading symbol.

344
00:25:30,000 --> 00:25:33,000
Now, there's another thing you could type into.

345
00:25:33,000 --> 00:25:35,000
It's called a CIK.

346
00:25:35,000 --> 00:25:40,000
It's a numerical identifier unique to a security.

347
00:25:40,000 --> 00:25:44,000
This stock has a CIK.

348
00:25:44,000 --> 00:25:46,000
This bond has a CIK.

349
00:25:46,000 --> 00:25:50,000
So if you know those, you could use those, but who knows those?

350
00:25:50,000 --> 00:25:52,000
Use a trading symbol.

351
00:25:52,000 --> 00:25:54,000
And I'm going to do this one.

352
00:25:54,000 --> 00:25:58,000
United States Steel Corporation.

353
00:25:58,000 --> 00:26:04,000
Oh, Edgar is being difficult today.

354
00:26:04,000 --> 00:26:05,000
Yes.

355
00:26:05,000 --> 00:26:06,000
There we go.

356
00:26:06,000 --> 00:26:09,000
United States Steel Corp.

357
00:26:09,000 --> 00:26:12,000
Now, let's talk.

358
00:26:12,000 --> 00:26:16,000
You need to know this.

359
00:26:16,000 --> 00:26:23,000
A public corporation is required to file a number of different documents.

360
00:26:23,000 --> 00:26:27,000
There is form this, form that.

361
00:26:27,000 --> 00:26:31,000
Now, the ones that are the most common that you would know,

362
00:26:31,000 --> 00:26:38,000
that you will know like the back of your hand as finance people, are these.

363
00:26:38,000 --> 00:26:45,000
The form, and again, I've got the wrong, who thought of this?

364
00:26:45,000 --> 00:26:52,000
The form 10.

365
00:26:52,000 --> 00:26:57,000
Now, there's a form 10Qs, or sometimes you'll see a dash in there,

366
00:26:57,000 --> 00:27:01,000
in the form 10K.

367
00:27:01,000 --> 00:27:07,000
The Qs are quarterly, and they accumulate to become the annual K.

368
00:27:07,000 --> 00:27:11,000
We call them the Ks and Qs.

369
00:27:11,000 --> 00:27:19,000
These are the reports of the company and its financial condition.

370
00:27:19,000 --> 00:27:26,000
It is words, and it is numbers.

371
00:27:26,000 --> 00:27:31,000
And as I said before, back in the day, these were not particularly reliable.

372
00:27:31,000 --> 00:27:34,000
Companies lied. They misstated.

373
00:27:34,000 --> 00:27:39,000
And some of them, they had auditors who would rubber stamp them,

374
00:27:39,000 --> 00:27:41,000
lawyers would rubber stamp them.

375
00:27:41,000 --> 00:27:45,000
The executives of the company were too important and busy to look at them,

376
00:27:45,000 --> 00:27:49,000
and lots of bad things came out of it.

377
00:27:49,000 --> 00:27:54,000
And finally, it got to the point of some major scandals involving companies

378
00:27:54,000 --> 00:27:57,000
like Enron and Worldcom and all that.

379
00:27:57,000 --> 00:27:59,000
And the SEC cracked down.

380
00:27:59,000 --> 00:28:05,000
Well, Congress cracked down, and the SEC moved forward with regulations about it.

381
00:28:05,000 --> 00:28:08,000
That was Sarbanes-Oxley, which required that the officers

382
00:28:08,000 --> 00:28:14,000
and director personally sign those, personally sign them.

383
00:28:14,000 --> 00:28:17,000
Because if there was a material misstatement of fact,

384
00:28:17,000 --> 00:28:23,000
then the SEC could levy civil fines against the corporation

385
00:28:23,000 --> 00:28:27,000
and against the officers and directors.

386
00:28:27,000 --> 00:28:32,000
And if it was egregious enough, then they could refer it for the matter

387
00:28:32,000 --> 00:28:37,000
for criminal prosecution to the Department of Justice.

388
00:28:37,000 --> 00:28:43,000
And so that means that the officers and directors could end up not just paying fines,

389
00:28:43,000 --> 00:28:48,000
they could go to prison for what they were doing, if they were lying.

390
00:28:48,000 --> 00:28:55,000
So that got us to the point where we had a lot more assurance.

391
00:28:55,000 --> 00:28:59,000
Because after Enron and Worldcom, the markets,

392
00:28:59,000 --> 00:29:04,000
where do we know that we've got truthful information?

393
00:29:04,000 --> 00:29:09,000
That was why Congress stepped in and why the SEC moved as rapidly as they did

394
00:29:09,000 --> 00:29:16,000
to enforce, to make regulations around the laws, so that we had that confidence back.

395
00:29:16,000 --> 00:29:19,000
So we can rely on these statements.

396
00:29:19,000 --> 00:29:25,000
That does not mean that there are not times when something could be done wrong.

397
00:29:25,000 --> 00:29:31,000
Almost all the players in the business are as ethical as they simply must be.

398
00:29:31,000 --> 00:29:38,000
And if their asses are on the line, then they're the most ethical people you'll ever meet.

399
00:29:38,000 --> 00:29:42,000
But that doesn't mean, for example, Elon Musk.

400
00:29:42,000 --> 00:29:47,000
His company, he has materially misstated facts in his SEC filings.

401
00:29:47,000 --> 00:29:51,000
He's been fined, he's been threatened, and what does he do?

402
00:29:51,000 --> 00:29:55,000
He goes on Twitter and uses foul language about the SEC.

403
00:29:55,000 --> 00:30:02,000
So it's only as reliable as the people who are preparing them.

404
00:30:02,000 --> 00:30:07,000
But it is highly reliable because, like I said, almost all corporate executives

405
00:30:07,000 --> 00:30:15,000
and auditing firms and law firms, they want to do it right because they have to do it right.

406
00:30:15,000 --> 00:30:18,000
Now, the 10K and the 10Q.

407
00:30:18,000 --> 00:30:22,000
Another one that I'll bring up is the Form 8K.

408
00:30:22,000 --> 00:30:24,000
Now, these are periodic.

409
00:30:24,000 --> 00:30:27,000
Form 10Q, every quarter.

410
00:30:27,000 --> 00:30:29,000
Form 10K, every year.

411
00:30:29,000 --> 00:30:36,000
Now, there's another one, the Form 8K.

412
00:30:36,000 --> 00:30:41,000
This is a report of a non-recurring event.

413
00:30:41,000 --> 00:30:46,000
These can be filed several times, more than several times a year.

414
00:30:46,000 --> 00:30:50,000
Okay, let me think.

415
00:30:50,000 --> 00:30:56,000
You, sir, you are the chief financial officer of Megacorp International.

416
00:30:56,000 --> 00:31:00,000
You were just abducted by aliens.

417
00:31:00,000 --> 00:31:03,000
That's a Form 8K right there.

418
00:31:03,000 --> 00:31:07,000
The chief financial officer was abducted by aliens.

419
00:31:07,000 --> 00:31:12,000
You file it with the SEC because the investors want to know.

420
00:31:12,000 --> 00:31:18,000
Okay, now they return you two weeks later, and let me tell you, you are a changed man,

421
00:31:18,000 --> 00:31:20,000
but they bring you back.

422
00:31:20,000 --> 00:31:27,000
So there's another 8K filing right there.

423
00:31:27,000 --> 00:31:33,000
You, sir, you were fired as the CEO.

424
00:31:33,000 --> 00:31:36,000
That's a Form 8K, and I can see why they would.

425
00:31:36,000 --> 00:31:38,000
A Form 8K, okay?

426
00:31:38,000 --> 00:31:45,000
Anything that is a material, and you understand this is where the investors can get solid information.

427
00:31:45,000 --> 00:31:49,000
In fact, it doesn't even have to be something you would think of.

428
00:31:49,000 --> 00:31:57,000
Back in my time, I made a lot of money filing Form 8Ks for these little podunk companies.

429
00:31:57,000 --> 00:32:01,000
They wouldn't tell me they were going to do it, but they'd make some press release.

430
00:32:01,000 --> 00:32:05,000
Our disruptive technology is on the verge of production.

431
00:32:05,000 --> 00:32:07,000
Stay tuned.

432
00:32:07,000 --> 00:32:09,000
One after the other, pump and dump.

433
00:32:09,000 --> 00:32:13,000
They would pump it up, and then their window on the Rule 144 sock would open.

434
00:32:13,000 --> 00:32:18,000
They'd sell, dump out, and I'd say every time they did this, they'd tell me afterwards,

435
00:32:18,000 --> 00:32:21,000
I'd say, well, I've got to get an 8K out for you.

436
00:32:21,000 --> 00:32:23,000
Are you sure?

437
00:32:23,000 --> 00:32:25,000
Well, you can go to jail if you want.

438
00:32:25,000 --> 00:32:31,000
I'm going to step out of the way and send an advisory letter to you doing this

439
00:32:31,000 --> 00:32:35,000
telling you that you should have or you should file an 8K.

440
00:32:35,000 --> 00:32:39,000
So my butt's covered, and you decide, do you want me to file an 8K,

441
00:32:39,000 --> 00:32:43,000
or do you want to save yourself 40 bucks and not?

442
00:32:43,000 --> 00:32:48,000
Back then, this was in the 80s and 90s.

443
00:32:48,000 --> 00:32:52,000
Okay, so the Form 8K is just something to keep an eye on.

444
00:32:52,000 --> 00:32:54,000
You know, they say, oh, they've filed Form 8K.

445
00:32:54,000 --> 00:32:57,000
You open it up, and sometimes, well, I just saw that in the news.

446
00:32:57,000 --> 00:32:59,000
I mean, they watch these 8Ks.

447
00:32:59,000 --> 00:33:02,000
The heavies watch these all the time,

448
00:33:02,000 --> 00:33:07,000
and they try to get in front of even the filing of the 8K to announce it on the news.

449
00:33:07,000 --> 00:33:11,000
So a lot of times you say, oh, well, I just saw that in the news.

450
00:33:11,000 --> 00:33:14,000
But once in a while, something, you read it carefully,

451
00:33:14,000 --> 00:33:18,000
and it will say a little more than the news has caught up, caught.

452
00:33:18,000 --> 00:33:20,000
So anyway, that's something to look at there.

453
00:33:20,000 --> 00:33:22,000
Now, let's take you over here.

454
00:33:22,000 --> 00:33:24,000
Watch what I do.

455
00:33:24,000 --> 00:33:28,000
I'm going to look for 8Ks, for the 10Ks, rather.

456
00:33:28,000 --> 00:33:32,000
Now, notice that under the K, you also got the Qs.

457
00:33:32,000 --> 00:33:35,000
But I'm going to grab for the last K that they filed.

458
00:33:35,000 --> 00:33:37,000
Oh, look at this.

459
00:33:37,000 --> 00:33:40,000
US Steel just filed an 8K.

460
00:33:40,000 --> 00:33:46,000
That means it's fresh meat.

461
00:33:46,000 --> 00:33:50,000
Now, let's go in here, and I'm going to click the box.

462
00:33:50,000 --> 00:33:52,000
Don't click the hyperlink like this.

463
00:33:52,000 --> 00:33:56,000
Click the box link, filing.

464
00:33:56,000 --> 00:33:59,000
Now, first things first.

465
00:33:59,000 --> 00:34:05,000
This is, we're going to go ultimately to this blue interactive data.

466
00:34:05,000 --> 00:34:12,000
Before we go there, this is the electronic equivalent of the paper document we used to make.

467
00:34:12,000 --> 00:34:19,000
They create the document, and then these are the hyperlinks by reference that are in the 10K.

468
00:34:19,000 --> 00:34:26,000
So in other words, there would be a link to each of these exhibits within the 10K.

469
00:34:26,000 --> 00:34:30,000
It's a little bit old school now, but it's still pretty cool.

470
00:34:30,000 --> 00:34:36,000
But let's look at this little thing right here.

471
00:34:36,000 --> 00:34:41,000
This is a 10K, and it looks just like the ones we used to file,

472
00:34:41,000 --> 00:34:46,000
except that we weren't allowed to use colors and little logos.

473
00:34:46,000 --> 00:34:50,000
Back in my time, they would have hanged me if I put pretty little pictures in it.

474
00:34:50,000 --> 00:34:51,000
But this is the 8K.

475
00:34:51,000 --> 00:34:55,000
Let me show you how long an 8K is.

476
00:34:55,000 --> 00:34:57,000
And on, and on, and on.

477
00:34:57,000 --> 00:35:02,000
We're going to get down to it about when Jesus comes back.

478
00:35:02,000 --> 00:35:06,000
But down here at the bottom, the reason I drag it clear down here to the bottom, well, geez.

479
00:35:06,000 --> 00:35:08,000
Do you call that the 40 bucks?

480
00:35:08,000 --> 00:35:09,000
No, that was the 8K.

481
00:35:09,000 --> 00:35:14,000
This, I charged out the ass $500.

482
00:35:14,000 --> 00:35:16,000
But I made it look like I was the martyr of the century.

483
00:35:16,000 --> 00:35:18,000
Oh my God, I'm charging.

484
00:35:18,000 --> 00:35:22,000
I had it down in the computer templates back in WordPerfect.

485
00:35:22,000 --> 00:35:27,000
And it load as one, two, three, and I'd copy and paste, copy and paste.

486
00:35:27,000 --> 00:35:31,000
It was actually about two days of work for me back then.

487
00:35:31,000 --> 00:35:32,000
Okay, look at these.

488
00:35:32,000 --> 00:35:35,000
These are electronic signatures.

489
00:35:35,000 --> 00:35:37,000
Oh, look at this.

490
00:35:37,000 --> 00:35:38,000
All these signatures.

491
00:35:38,000 --> 00:35:46,000
These are the fellows and ladies who would go to jail, get fined and go to jail if they lie.

492
00:35:46,000 --> 00:35:47,000
Okay.

493
00:35:47,000 --> 00:35:49,000
Well, now we can go back through here.

494
00:35:49,000 --> 00:35:55,000
See, those are those hyperlinks, see them, that jump you to the other documents in there.

495
00:35:55,000 --> 00:35:58,000
Now you're saying, well, what about these financial statements, fat boy?

496
00:35:58,000 --> 00:35:59,000
Do we have to look at them here?

497
00:35:59,000 --> 00:36:00,000
Absolutely not.

498
00:36:00,000 --> 00:36:02,000
But I do want to show you something.

499
00:36:02,000 --> 00:36:07,000
There is one section of this which is really important.

500
00:36:07,000 --> 00:36:13,000
If you are doing research for a term paper, for investment purposes,

501
00:36:13,000 --> 00:36:20,000
for your interest in getting a job with a public company, let me take you clear up here to the top

502
00:36:20,000 --> 00:36:28,000
so I can use the link up here.

503
00:36:28,000 --> 00:36:35,000
Item seven, management discussion and analysis of financial condition and results of operations.

504
00:36:35,000 --> 00:36:41,000
We call it the MD&A, the MD&A, management discussion and analysis.

505
00:36:41,000 --> 00:36:51,000
Now, this section is where the company tells the story of the numbers.

506
00:36:51,000 --> 00:36:59,000
It goes through and they are surprisingly glib, in other words, straight up about what's been going on with them

507
00:36:59,000 --> 00:37:05,000
in terms of where the ratios are going, where the numbers are going, why they're doing this,

508
00:37:05,000 --> 00:37:14,000
competitive issues of the company, possibilities of lawsuits and all that kind of stuff, all in here.

509
00:37:14,000 --> 00:37:15,000
And it goes on.

510
00:37:15,000 --> 00:37:21,000
They show little miniatures of the financials, snippets from the financials.

511
00:37:21,000 --> 00:37:24,000
On and on they do this.

512
00:37:24,000 --> 00:37:27,000
This is just begging.

513
00:37:27,000 --> 00:37:32,000
You can say in a term paper, you can just highlight and copy and paste.

514
00:37:32,000 --> 00:37:36,000
This is in the company's documents.

515
00:37:36,000 --> 00:37:40,000
I didn't find this in Wikistupedia or Investopedia.

516
00:37:40,000 --> 00:37:43,000
I didn't find this in some news article.

517
00:37:43,000 --> 00:37:49,000
This is the seminal document, the primary document in which they said.

518
00:37:49,000 --> 00:37:56,000
So you don't have to give opinions, at least certainly not before you look at what they have had to say about it.

519
00:37:56,000 --> 00:37:58,000
Look at all this.

520
00:37:58,000 --> 00:38:03,000
And it is, they got pictures, you can even copy and paste the pictures.

521
00:38:03,000 --> 00:38:05,000
Be sure to cite your source.

522
00:38:05,000 --> 00:38:10,000
Source, 10K, 2023.

523
00:38:10,000 --> 00:38:18,000
So no one can dispute that this is authoritative, unlike any other place that you can get the data or the graphs from.

524
00:38:18,000 --> 00:38:20,000
But wait, there's more.

525
00:38:20,000 --> 00:38:23,000
Okay, you've got the MDA, MDNA.

526
00:38:23,000 --> 00:38:30,000
Let me get out of this and we're going to go back to that.

527
00:38:30,000 --> 00:38:34,000
I'm really, okay.

528
00:38:34,000 --> 00:38:36,000
Let me go back to it this way, finally.

529
00:38:36,000 --> 00:38:43,000
Remember I told you about that blue, it's in the upper left side, interactive data.

530
00:38:43,000 --> 00:38:49,000
First things first, click on it.

531
00:38:49,000 --> 00:38:57,000
And you will see that you can see summaries of all of the financial statements right here.

532
00:38:57,000 --> 00:39:03,000
Income statement balance sheet, all that kind of stuff, right here.

533
00:39:03,000 --> 00:39:10,000
Well, you could just look at it, you'll see me jump to this if I want to say something really quick about the numbers or I want to look something up.

534
00:39:10,000 --> 00:39:12,000
This is nice, interactive.

535
00:39:12,000 --> 00:39:17,000
But view the Excel document.

536
00:39:17,000 --> 00:39:26,000
This is every financial statement of the company.

537
00:39:26,000 --> 00:39:28,000
Close.

538
00:39:28,000 --> 00:39:31,000
Enable.

539
00:39:31,000 --> 00:39:33,000
Will you quit it?

540
00:39:33,000 --> 00:39:34,000
Okay.

541
00:39:34,000 --> 00:39:36,000
It starts out with a cover page.

542
00:39:36,000 --> 00:39:39,000
Now here's an interesting thing.

543
00:39:39,000 --> 00:39:49,000
If you were ever asked for the principal address of the corporation, here it is as reported to the United States Securities and Exchange Commission.

544
00:39:49,000 --> 00:39:50,000
Look at this.

545
00:39:50,000 --> 00:39:53,000
You get all this information right there.

546
00:39:53,000 --> 00:39:58,000
There is no better source than this for just the basics.

547
00:39:58,000 --> 00:40:01,000
Now let's go over here.

548
00:40:01,000 --> 00:40:03,000
Consolidated statement of operation.

549
00:40:03,000 --> 00:40:05,000
Oh, well, let me do this.

550
00:40:05,000 --> 00:40:09,000
You want to see financial statements.

551
00:40:09,000 --> 00:40:14,000
Each one of these tabs is a financial statement.

552
00:40:14,000 --> 00:40:15,000
And on.

553
00:40:15,000 --> 00:40:18,000
And what the?

554
00:40:18,000 --> 00:40:20,000
Oh, well, look at all that stuff.

555
00:40:20,000 --> 00:40:22,000
And I guarantee you, you really don't have to.

556
00:40:22,000 --> 00:40:27,000
But if you ever want to win at financial jeopardy, here it is.

557
00:40:27,000 --> 00:40:31,000
I'll take you a steal for $500, Alex.

558
00:40:31,000 --> 00:40:34,000
But anyway, let me take you back here.

559
00:40:34,000 --> 00:40:37,000
Excel.

560
00:40:37,000 --> 00:40:46,000
We're not going to do anything really fancy with Excel, but there are a couple of things that are just common workplace practices.

561
00:40:46,000 --> 00:40:50,000
If I could never get back to the beginning here.

562
00:40:50,000 --> 00:40:52,000
Really?

563
00:40:52,000 --> 00:40:53,000
Okay.

564
00:40:53,000 --> 00:41:17,000
Now the one thing is, what we will need, the documents that we will need, are the income statement, the balance sheet, and the statement of cash flows.

565
00:41:17,000 --> 00:41:19,000
For basic analysis.

566
00:41:19,000 --> 00:41:25,000
Now you could also do the statement of retained earnings here, but we can dig that out from these other ones.

567
00:41:25,000 --> 00:41:27,000
Retained earnings.

568
00:41:27,000 --> 00:41:41,000
These are the ones you want to locate them and scoot them over next to each other.

569
00:41:41,000 --> 00:41:45,000
You want to get them all together.

570
00:41:45,000 --> 00:41:49,000
And this is normal for even a manufacturing work environment.

571
00:41:49,000 --> 00:41:57,000
You shape your work environment in the way that will be the most efficient for you.

572
00:41:57,000 --> 00:42:01,000
And this one, okay, we've got the statement of operations.

573
00:42:01,000 --> 00:42:06,000
That's the income statement.

574
00:42:06,000 --> 00:42:11,000
Now, there's the balance sheet right there.

575
00:42:11,000 --> 00:42:18,000
So I want to scoot that one over so it sits next to...

576
00:42:18,000 --> 00:42:22,000
Well, I thought I did, but I still didn't get it quite over far enough.

577
00:42:22,000 --> 00:42:26,000
So, come on.

578
00:42:26,000 --> 00:42:30,000
So I'm going to put that one beside the income statement.

579
00:42:30,000 --> 00:42:36,000
Okay, now the last one, I'll find the statement of cash flows.

580
00:42:36,000 --> 00:42:38,000
There it is.

581
00:42:38,000 --> 00:42:48,000
So I'm going to shuttle that one over so that it is next to the balance sheet.

582
00:42:48,000 --> 00:42:58,000
And now you've got the three that you're going to need to work with all next to each other in this mess.

583
00:42:58,000 --> 00:43:00,000
Do that.

584
00:43:00,000 --> 00:43:02,000
Now, there's another.

585
00:43:02,000 --> 00:43:06,000
This is part of when you say, I know Excel.

586
00:43:06,000 --> 00:43:10,000
These, you would be expected to know these just automatically.

587
00:43:10,000 --> 00:43:17,000
One thing that you will definitely want to do is create a calculation sheet.

588
00:43:17,000 --> 00:43:32,000
Just between these two, I usually do it, insert a worksheet and call it calculations.

589
00:43:32,000 --> 00:43:43,000
This keeps your calculations from getting in the way of the core financial statements.

590
00:43:43,000 --> 00:43:52,000
Many are the horror stories of the primary worksheets in some company's Excel file.

591
00:43:52,000 --> 00:43:58,000
And some idiot goes in and starts doing back of the envelope calculations

592
00:43:58,000 --> 00:44:02,000
right smack in the middle of a primary sheet.

593
00:44:02,000 --> 00:44:03,000
And you don't want to do that.

594
00:44:03,000 --> 00:44:11,000
You want to put them over on the side where they are not going to interfere with the actual data itself,

595
00:44:11,000 --> 00:44:13,000
with the primary data.

596
00:44:13,000 --> 00:44:18,000
And there's another reason for this too, is that on the worksheet,

597
00:44:18,000 --> 00:44:25,000
you have the ability to shape what the end user sees.

598
00:44:25,000 --> 00:44:31,000
When you have a pile of important sheets,

599
00:44:31,000 --> 00:44:36,000
you don't want to show all of those in a meeting.

600
00:44:36,000 --> 00:44:39,000
You want to show what the results are.

601
00:44:39,000 --> 00:44:45,000
That's why you don't want them to be, well, I got it here on the income statement.

602
00:44:45,000 --> 00:44:47,000
We can look at this side calculation I did here.

603
00:44:47,000 --> 00:44:51,000
Well, let's swing over to this and they're seeing all of this data

604
00:44:51,000 --> 00:44:56,000
instead of the results, which is what you're supposed to be talking about in the meeting.

605
00:44:56,000 --> 00:45:00,000
Now, if they want to see something, you can flip over to one of those sheets,

606
00:45:00,000 --> 00:45:02,000
but you don't have to.

607
00:45:02,000 --> 00:45:05,000
You do your side calculations here,

608
00:45:05,000 --> 00:45:11,000
where they won't get in the way of everything else that you're doing.

609
00:45:11,000 --> 00:45:17,000
Now, this is why you might even see me do a couple of these for the ratio analysis,

610
00:45:17,000 --> 00:45:19,000
which is the subject of Chapter 4.

611
00:45:19,000 --> 00:45:22,000
We can even have another worksheet ratios,

612
00:45:22,000 --> 00:45:28,000
where you are just jumping and grabbing numbers from several of the different sheets

613
00:45:28,000 --> 00:45:31,000
and doing the calculation on the ratio sheet.

614
00:45:31,000 --> 00:45:38,000
That way, you're not worried about causing yourself to try to figure out,

615
00:45:38,000 --> 00:45:43,000
well, I'll put the asset activity ratios on the income statement.

616
00:45:43,000 --> 00:45:46,000
Maybe I'll put the liquidity ratios on the balance sheet.

617
00:45:46,000 --> 00:45:52,000
We've got them all ratios in one sheet.

618
00:45:52,000 --> 00:45:56,000
One more thing.

619
00:45:56,000 --> 00:46:01,000
Back in the day, and I keep saying this because it's a good reference for you,

620
00:46:01,000 --> 00:46:11,000
we had each line of each financial statement had a name that you were supposed to use,

621
00:46:11,000 --> 00:46:15,000
and every line was supposed to be there.

622
00:46:15,000 --> 00:46:18,000
You couldn't call things what you wanted.

623
00:46:18,000 --> 00:46:21,000
You couldn't, well, we'll leave that out because no one uses that.

624
00:46:21,000 --> 00:46:24,000
That's not the case anymore.

625
00:46:24,000 --> 00:46:27,000
Now, in some cases, it's not, you know, you can figure it out.

626
00:46:27,000 --> 00:46:31,000
But let me show you here, and I'm sure you're all really good at accounting now,

627
00:46:31,000 --> 00:46:34,000
so you can see a line that's missing here.

628
00:46:34,000 --> 00:46:38,000
It's missing in most companies' income statements.

629
00:46:38,000 --> 00:46:42,000
Some still put it in, old school, but many don't.

630
00:46:42,000 --> 00:46:44,000
Do you see the line that's missing here?

631
00:46:44,000 --> 00:46:45,000
I'll give you a hint.

632
00:46:45,000 --> 00:46:54,000
It's between rows three and ten.

633
00:46:54,000 --> 00:46:59,000
Do you see the one that's missing?

634
00:46:59,000 --> 00:47:01,000
Yeah?

635
00:47:01,000 --> 00:47:02,000
It'd be EBITDA?

636
00:47:02,000 --> 00:47:03,000
Nope.

637
00:47:03,000 --> 00:47:04,000
Or EBITDA?

638
00:47:04,000 --> 00:47:05,000
Nope.

639
00:47:05,000 --> 00:47:06,000
It's gross income.

640
00:47:06,000 --> 00:47:08,000
Revenues minus cost of goods sold.

641
00:47:08,000 --> 00:47:10,000
It's not there.

642
00:47:10,000 --> 00:47:11,000
We need it.

643
00:47:11,000 --> 00:47:12,000
We'll need it for ratio analysis.

644
00:47:12,000 --> 00:47:15,000
It's one of our ratios, a part of one of our ratios.

645
00:47:15,000 --> 00:47:19,000
So we have to, so that's a little warning to you.

646
00:47:19,000 --> 00:47:23,000
You want to put, you'll have to fix, this one you'll have to fix.

647
00:47:23,000 --> 00:47:29,000
On line seven, you insert, and there you go.

648
00:47:29,000 --> 00:47:33,000
So then we can have, now, they call operating expenses,

649
00:47:33,000 --> 00:47:35,000
cost of goods sold is an operating expense.

650
00:47:35,000 --> 00:47:36,000
It's not.

651
00:47:36,000 --> 00:47:45,000
So we're going to put in gross income.

652
00:47:45,000 --> 00:47:49,000
And gross income is merely your revenues minus your expenses.

653
00:47:49,000 --> 00:48:00,000
Equals revenue minus expenses.

654
00:48:00,000 --> 00:48:04,000
And then we haul that little mother over.

655
00:48:04,000 --> 00:48:06,000
Whoops, didn't mean to do that.

656
00:48:06,000 --> 00:48:08,000
Try that again.

657
00:48:08,000 --> 00:48:09,000
Grab it.

658
00:48:09,000 --> 00:48:11,000
I should do this with a keyboard.

659
00:48:11,000 --> 00:48:14,000
You're not cool if you use the mouse for this,

660
00:48:14,000 --> 00:48:18,000
but it's better for you to see it if I use the mouse.

661
00:48:18,000 --> 00:48:21,000
And there's, so you have your gross income put in there.

662
00:48:21,000 --> 00:48:23,000
I had to put that in.

663
00:48:23,000 --> 00:48:28,000
Now I'll show you another line here they put in that you

664
00:48:28,000 --> 00:48:31,000
probably won't see in most financial statements,

665
00:48:31,000 --> 00:48:33,000
interestingly enough.

666
00:48:33,000 --> 00:48:36,000
Depreciation and amortization.

667
00:48:36,000 --> 00:48:37,000
They put it in.

668
00:48:37,000 --> 00:48:39,000
Most companies don't put it in.

669
00:48:39,000 --> 00:48:42,000
And some of them lump it in with SG&A,

670
00:48:42,000 --> 00:48:45,000
selling general and administrative expenses.

671
00:48:45,000 --> 00:48:48,000
But some of them, it's just like magic.

672
00:48:48,000 --> 00:48:51,000
They use it for the calculations,

673
00:48:51,000 --> 00:48:54,000
but they don't actually put it in there.

674
00:48:54,000 --> 00:48:59,000
So anyway, good grief.

675
00:48:59,000 --> 00:49:05,000
You are right though that, good grief.

676
00:49:05,000 --> 00:49:08,000
Okay, earnings before interest and taxes.

677
00:49:08,000 --> 00:49:10,000
Now let me give you something.

678
00:49:10,000 --> 00:49:14,000
EBI, earnings before interest and taxes is only one of the

679
00:49:14,000 --> 00:49:16,000
names this could have.

680
00:49:16,000 --> 00:49:21,000
Another name it could have is operating income.

681
00:49:21,000 --> 00:49:26,000
That's another name that it could have is operating income.

682
00:49:26,000 --> 00:49:28,000
It could also be called EBIT.

683
00:49:28,000 --> 00:49:31,000
So in other words, where the hell was it?

684
00:49:31,000 --> 00:49:32,000
There it is.

685
00:49:32,000 --> 00:49:35,000
Earnings before, that could be called operating income.

686
00:49:35,000 --> 00:49:36,000
Yeah?

687
00:49:36,000 --> 00:49:37,000
Huh?

688
00:49:37,000 --> 00:49:39,000
EBIT.

689
00:49:39,000 --> 00:49:40,000
EBIT.

690
00:49:40,000 --> 00:49:42,000
EBIT.

691
00:49:42,000 --> 00:49:44,000
EBIT.

692
00:49:44,000 --> 00:49:45,000
Say it again.

693
00:49:45,000 --> 00:49:47,000
EBIEA.

694
00:49:47,000 --> 00:49:49,000
No, EBITTA.

695
00:49:49,000 --> 00:49:50,000
Oh, no, no, no.

696
00:49:50,000 --> 00:49:51,000
Oh, I'm getting to that one.

697
00:49:51,000 --> 00:49:52,000
I'm getting to that one.

698
00:49:52,000 --> 00:50:00,000
EBITDA is earnings before taxes, depreciation, and amortization.

699
00:50:00,000 --> 00:50:04,000
Now that line isn't in here and it's very rarely in here.

700
00:50:04,000 --> 00:50:08,000
What you would do is if you wanted EBITDA,

701
00:50:08,000 --> 00:50:14,000
you would take operating income and add back depreciation expense.

702
00:50:14,000 --> 00:50:18,000
Then it would be earnings before interest and taxes

703
00:50:18,000 --> 00:50:20,000
and depreciation and amortization.

704
00:50:20,000 --> 00:50:21,000
So I could put that in here.

705
00:50:21,000 --> 00:50:25,000
I'm going to take it out because that will really confuse me and I'm old.

706
00:50:25,000 --> 00:50:26,000
Okay?

707
00:50:26,000 --> 00:50:44,000
But you could say earnings before interest

708
00:50:44,000 --> 00:50:58,000
and interest and taxes and income taxes.

709
00:50:58,000 --> 00:51:00,000
Was that a fart?

710
00:51:00,000 --> 00:51:01,000
No, that was my shoe.

711
00:51:01,000 --> 00:51:02,000
I'm so sorry.

712
00:51:02,000 --> 00:51:03,000
Good, good.

713
00:51:03,000 --> 00:51:04,000
Okay, we're cool.

714
00:51:04,000 --> 00:51:05,000
We're good.

715
00:51:05,000 --> 00:51:06,000
We're good.

716
00:51:06,000 --> 00:51:09,000
I thought he put a whoopee cushion under you or something.

717
00:51:09,000 --> 00:51:13,000
I didn't know it was going to be that loud.

718
00:51:13,000 --> 00:51:20,000
Depreciation and amortization.

719
00:51:20,000 --> 00:51:22,000
Now I'm going to take this one back out here,

720
00:51:22,000 --> 00:51:25,000
but I will show you.

721
00:51:25,000 --> 00:51:27,000
And amortization.

722
00:51:27,000 --> 00:51:32,000
Because the book does mention this one a couple of times, amortization.

723
00:51:32,000 --> 00:51:41,000
And that is EBITDA.

724
00:51:41,000 --> 00:51:43,000
Okay?

725
00:51:43,000 --> 00:51:51,000
And that one, what it does is it takes equals this one

726
00:51:51,000 --> 00:52:07,000
and it puts back the depreciation and amortization.

727
00:52:07,000 --> 00:52:14,000
Now let me point out something here.

728
00:52:14,000 --> 00:52:20,000
There are some people...

729
00:52:20,000 --> 00:52:22,000
Do you like pork?

730
00:52:22,000 --> 00:52:23,000
Yeah, pork is good.

731
00:52:23,000 --> 00:52:24,000
I have a smoker.

732
00:52:24,000 --> 00:52:27,000
I can smoke a pork butt this big.

733
00:52:27,000 --> 00:52:30,000
And let me tell you, if you don't have atherosclerosis,

734
00:52:30,000 --> 00:52:33,000
you will after my pork butt.

735
00:52:33,000 --> 00:52:34,000
Okay?

736
00:52:34,000 --> 00:52:36,000
Now, are you a pig farmer?

737
00:52:36,000 --> 00:52:37,000
No.

738
00:52:37,000 --> 00:52:41,000
Good.

739
00:52:41,000 --> 00:52:44,000
We smoke pork butt.

740
00:52:44,000 --> 00:52:46,000
The accountants are the pig farmers.

741
00:52:46,000 --> 00:52:48,000
And I should not have said that.

742
00:52:48,000 --> 00:52:50,000
That came out.

743
00:52:50,000 --> 00:52:51,000
It's Asperger's syndrome.

744
00:52:51,000 --> 00:52:53,000
Does that do well by me?

745
00:52:53,000 --> 00:52:54,000
Okay.

746
00:52:54,000 --> 00:52:57,000
Look, they create these numbers.

747
00:52:57,000 --> 00:52:59,000
We have to do things to them.

748
00:52:59,000 --> 00:53:03,000
But this is not our wheelhouse.

749
00:53:03,000 --> 00:53:06,000
We just step up to the wheelhouse and say,

750
00:53:06,000 --> 00:53:10,000
can you bring us a loaf of bread from that grinding mill thing

751
00:53:10,000 --> 00:53:12,000
that you have in the wheelhouse?

752
00:53:12,000 --> 00:53:15,000
You see, we do have to fix numbers.

753
00:53:15,000 --> 00:53:20,000
We have to use these numbers and work these numbers around.

754
00:53:20,000 --> 00:53:23,000
But if you're saying, oh, God, is that what this course is about?

755
00:53:23,000 --> 00:53:25,000
Oh, God, no, no, no.

756
00:53:25,000 --> 00:53:27,000
It's like I said, when I teach accounting,

757
00:53:27,000 --> 00:53:29,000
I have to think about do I want to do this

758
00:53:29,000 --> 00:53:31,000
or do I want to just kill myself?

759
00:53:31,000 --> 00:53:33,000
But we do it.

760
00:53:33,000 --> 00:53:36,000
It's just a necessary evil in our world,

761
00:53:36,000 --> 00:53:38,000
is that we have to do these kinds of fix-ups

762
00:53:38,000 --> 00:53:40,000
and pretty the thing up.

763
00:53:40,000 --> 00:53:42,000
Now, I'm going to take this line out right now

764
00:53:42,000 --> 00:53:48,000
simply because it's going to drive me crazy having it in there.

765
00:53:48,000 --> 00:53:52,000
Because it's not necessary to our financial analysis.

766
00:53:52,000 --> 00:53:55,000
The book mentions it, and I will too, once in a while.

767
00:53:55,000 --> 00:54:00,000
And companies, there are some companies, EBI TDA, EBI TDA.

768
00:54:00,000 --> 00:54:04,000
But that's neither here nor there for us.

769
00:54:04,000 --> 00:54:08,000
But anyway, okay, we're ready to roll here

770
00:54:08,000 --> 00:54:10,000
on some more important things.

771
00:54:10,000 --> 00:54:17,000
But this shaping of these sheets so that they are usable by us.

772
00:54:17,000 --> 00:54:19,000
This goes back to my first lecture.

773
00:54:19,000 --> 00:54:22,000
We are constituencies.

774
00:54:22,000 --> 00:54:25,000
We are consumers of information products

775
00:54:25,000 --> 00:54:28,000
that are created by accountants.

776
00:54:28,000 --> 00:54:32,000
But we are a kind of constituency where we have to...

777
00:54:32,000 --> 00:54:35,000
that's not a final good for us.

778
00:54:35,000 --> 00:54:37,000
What they're producing isn't a final good.

779
00:54:37,000 --> 00:54:39,000
It's an intermediate good.

780
00:54:39,000 --> 00:54:42,000
And then we have to bend metal on it,

781
00:54:42,000 --> 00:54:46,000
as they say in manufacturing, to make it what we want.

782
00:54:46,000 --> 00:54:48,000
That's important for you to appreciate

783
00:54:48,000 --> 00:54:50,000
about what I'm doing here.

784
00:54:50,000 --> 00:54:56,000
I'm preparing it to bend metal on this mess of numbers.

785
00:54:56,000 --> 00:55:01,000
Now, just to jump into it and have just some fun,

786
00:55:01,000 --> 00:55:02,000
we got...

787
00:55:02,000 --> 00:55:05,000
Oh, I was going to say I got a blank sheet there.

788
00:55:05,000 --> 00:55:07,000
I made that blank sheet.

789
00:55:07,000 --> 00:55:08,000
We look at these.

790
00:55:08,000 --> 00:55:10,000
Now, you notice you've got a couple of years of data.

791
00:55:10,000 --> 00:55:13,000
The balance sheet is going to sort of restrict us.

792
00:55:13,000 --> 00:55:16,000
We can put another year of numbers in there from the 10K,

793
00:55:16,000 --> 00:55:18,000
if we want.

794
00:55:18,000 --> 00:55:20,000
But I'm not going to worry too much about that now.

795
00:55:20,000 --> 00:55:25,000
And we got our consolidated...

796
00:55:25,000 --> 00:55:26,000
Did I move over?

797
00:55:26,000 --> 00:55:28,000
Yeah, I got the statement of cash flows.

798
00:55:28,000 --> 00:55:29,000
There it is.

799
00:55:29,000 --> 00:55:30,000
Statement of cash flows.

800
00:55:30,000 --> 00:55:32,000
We got the balance sheet.

801
00:55:32,000 --> 00:55:35,000
And we've got the calculations.

802
00:55:35,000 --> 00:55:38,000
And we got our income statement, statement of operations.

803
00:55:38,000 --> 00:55:40,000
Now, there, income statement.

804
00:55:40,000 --> 00:55:42,000
It used to be called the income statement.

805
00:55:42,000 --> 00:55:44,000
Some people call it the profit and loss statement.

806
00:55:44,000 --> 00:55:47,000
Now they can call it the consolidated statement of operations.

807
00:55:47,000 --> 00:55:49,000
They can call it a lot of different things.

808
00:55:49,000 --> 00:55:51,000
They all mean the same thing.

809
00:55:51,000 --> 00:55:53,000
But so you have to be a little flexible

810
00:55:53,000 --> 00:55:59,000
in the terminology these days about this.

811
00:55:59,000 --> 00:56:03,000
Now, a couple of just quick little terms,

812
00:56:03,000 --> 00:56:06,000
and then I'll do some breakdowns here.

813
00:56:06,000 --> 00:56:10,000
The first thing is that we have our gross income.

814
00:56:10,000 --> 00:56:17,000
That is how much was left after wholesale.

815
00:56:17,000 --> 00:56:26,000
So out of them pulling in $18 billion last year,

816
00:56:26,000 --> 00:56:33,000
$2.25 billion survived their wholesale costs.

817
00:56:33,000 --> 00:56:38,000
Now, we'll do a ratio that will tell you how many cents out of every dollar.

818
00:56:38,000 --> 00:56:40,000
It's called a gross margin.

819
00:56:40,000 --> 00:56:41,000
But that is...

820
00:56:41,000 --> 00:56:45,000
Sometimes people who are not in the world of business

821
00:56:45,000 --> 00:56:49,000
talk about these ridiculous profit margins and all this.

822
00:56:49,000 --> 00:56:50,000
Look right here.

823
00:56:50,000 --> 00:56:51,000
This is U.S. Steel.

824
00:56:51,000 --> 00:56:54,000
And out of the $18 billion,

825
00:56:54,000 --> 00:57:02,000
only $2.25 billion survived their wholesale costs of that steel that they make.

826
00:57:02,000 --> 00:57:09,000
That tells you this is not unusual for that margin to be thin, as we say.

827
00:57:09,000 --> 00:57:12,000
It's a thin gross margin on this.

828
00:57:12,000 --> 00:57:14,000
Now, this one, you'll hear me use the term SG&A.

829
00:57:14,000 --> 00:57:18,000
Selling General and Administrative Expenses.

830
00:57:18,000 --> 00:57:20,000
It used to be broken down.

831
00:57:20,000 --> 00:57:27,000
Wages, mailings, meals and entertainment, travel, utilities, all that kind of stuff.

832
00:57:27,000 --> 00:57:28,000
They don't do it anymore.

833
00:57:28,000 --> 00:57:34,000
You'd have to go to the notes to see the pieces of it, the parts of it.

834
00:57:34,000 --> 00:57:35,000
That's why the notes are important.

835
00:57:35,000 --> 00:57:36,000
If you want to see...

836
00:57:36,000 --> 00:57:38,000
Okay, I see here...

837
00:57:38,000 --> 00:57:39,000
Look at their...

838
00:57:39,000 --> 00:57:41,000
By the way, notice something.

839
00:57:41,000 --> 00:57:45,000
Even before we do the ratios,

840
00:57:45,000 --> 00:57:49,000
look how their gross margin has been collapsing.

841
00:57:49,000 --> 00:57:51,000
That's scary stuff right there.

842
00:57:51,000 --> 00:57:52,000
Do you see it?

843
00:57:52,000 --> 00:57:58,000
Do you see how the gross income, I should say, gross income has been tailing?

844
00:57:58,000 --> 00:58:03,000
Compared to two years ago, it's less than half of what it was.

845
00:58:03,000 --> 00:58:06,000
That's not a good sign right there.

846
00:58:06,000 --> 00:58:16,000
So what I'm saying here is that before you attack and start doing financial analysis, ratios, free cash flow, all that kind of good stuff,

847
00:58:16,000 --> 00:58:19,000
before you attack, look at it.

848
00:58:19,000 --> 00:58:20,000
Like we did in the Army.

849
00:58:20,000 --> 00:58:25,000
Before we go in and wage a fight, we do recon.

850
00:58:25,000 --> 00:58:26,000
And that's what we're doing here.

851
00:58:26,000 --> 00:58:28,000
We're just looking at it.

852
00:58:28,000 --> 00:58:29,000
Just sit back.

853
00:58:29,000 --> 00:58:32,000
Don't try to calculate things.

854
00:58:32,000 --> 00:58:41,000
Just look at it with your eyes and let your minds notice what's going on overall.

855
00:58:41,000 --> 00:58:42,000
This is important to us.

856
00:58:42,000 --> 00:58:44,000
This is what we do.

857
00:58:44,000 --> 00:58:54,000
This is why they pay us, is for us to go beyond the accounting and think about what we're seeing.

858
00:58:54,000 --> 00:58:57,000
See, he got picked up by that UFO.

859
00:58:57,000 --> 00:59:01,000
If he had just looked up, he would have said, that's a mothership.

860
00:59:01,000 --> 00:59:05,000
He was in a pasture.

861
00:59:05,000 --> 00:59:08,000
He and his friends were going to tip cattle, tip cows.

862
00:59:08,000 --> 00:59:09,000
You know what that is?

863
00:59:09,000 --> 00:59:11,000
You knock cows over.

864
00:59:11,000 --> 00:59:13,000
They were there to pick up cows.

865
00:59:13,000 --> 00:59:22,000
He was just in the wrong place at the wrong time because he didn't think motherships go to cow fields to pick up cows.

866
00:59:22,000 --> 00:59:25,000
Real problems for real people.

867
00:59:25,000 --> 00:59:29,000
That's why they pay us, to think about that.

868
00:59:29,000 --> 00:59:44,000
Anyway, we go down through here and we see down here, we're going to look at the earnings, net earnings.

869
00:59:44,000 --> 00:59:46,000
Just look at them.

870
00:59:46,000 --> 00:59:50,000
Is that a good story or a bad story you see there, sir?

871
00:59:50,000 --> 00:59:53,000
Look at their net earnings.

872
00:59:53,000 --> 00:59:56,000
Oh, I apologize.

873
00:59:56,000 --> 01:00:11,000
First, let's lower the lights and then let's make these sheets bigger.

874
01:00:11,000 --> 01:00:13,000
Net earnings.

875
01:00:13,000 --> 01:00:15,000
What do you see?

876
01:00:15,000 --> 01:00:16,000
Good.

877
01:00:16,000 --> 01:00:17,000
Good?

878
01:00:17,000 --> 01:00:19,000
You're looking the wrong way.

879
01:00:19,000 --> 01:00:24,000
Okay, traditionally, most recent on the left, then to the right.

880
01:00:24,000 --> 01:00:26,000
I apologize for warning.

881
01:00:26,000 --> 01:00:28,000
Well, then it sucks.

882
01:00:28,000 --> 01:00:38,000
Now, you can choose to have it either way, but it's traditional to have it most recent on the left and then from there back because that way you're looking at the one you care the most about.

883
01:00:38,000 --> 01:00:47,000
In this case, the technical term for what we see here is this sucks.

884
01:00:47,000 --> 01:00:52,000
I mean, this is really bad.

885
01:00:52,000 --> 01:00:54,000
Do you see it?

886
01:00:54,000 --> 01:01:04,000
I mean, they are down, but the one thing that's interesting is notice something here.

887
01:01:04,000 --> 01:01:11,000
SG&A actually went up, but that wasn't material.

888
01:01:11,000 --> 01:01:13,000
That's not a big thing.

889
01:01:13,000 --> 01:01:16,000
This isn't explained by cost cutting.

890
01:01:16,000 --> 01:01:19,000
You can't say, well, we'll just cut costs.

891
01:01:19,000 --> 01:01:22,000
Their costs have not gone anywhere.

892
01:01:22,000 --> 01:01:24,000
So what else is going on?

893
01:01:24,000 --> 01:01:29,000
They've got more depreciation expense, but that's not enough.

894
01:01:29,000 --> 01:01:39,000
They've obviously done some investments, capital investments, and they've got more to depreciate now, but that's not enough to explain this.

895
01:01:39,000 --> 01:01:46,000
Restructuring really hasn't done a damn thing.

896
01:01:46,000 --> 01:01:55,000
So in other words, if I get down here, do you see where the blood is actually showing up at EBIT at operating income?

897
01:01:55,000 --> 01:01:56,000
Do you see it?

898
01:01:56,000 --> 01:02:01,000
Do you see where the damage is showing up first at EBIT?

899
01:02:01,000 --> 01:02:17,000
Well, the only thing that I can see, revenues have slid, cost of goods sold has gone up somewhat against revenues.

900
01:02:17,000 --> 01:02:22,000
Cost of goods sold has gone up against revenues.

901
01:02:22,000 --> 01:02:27,000
The hell?

902
01:02:27,000 --> 01:02:31,000
Wow.

903
01:02:31,000 --> 01:02:33,000
Interest expense?

904
01:02:33,000 --> 01:02:36,000
It's hard to call here.

905
01:02:36,000 --> 01:02:40,000
Where in the hell did they take...

906
01:02:40,000 --> 01:02:43,000
It has to have been the gross income.

907
01:02:43,000 --> 01:02:54,000
So that means that it was a combination of falling sales and relatively increasing wholesale costs.

908
01:02:54,000 --> 01:02:57,000
That was what caused the blood.

909
01:02:57,000 --> 01:02:59,000
Now this is where we're doing...

910
01:02:59,000 --> 01:03:05,000
We're actually looking at a murder scene and trying to figure out who done it.

911
01:03:05,000 --> 01:03:09,000
And here, who done it, it was two killers.

912
01:03:09,000 --> 01:03:18,000
One was falling sales, and the other was relatively rising, against those sales, rising cost of goods sold.

913
01:03:18,000 --> 01:03:20,000
Those were the two culprits.

914
01:03:20,000 --> 01:03:28,000
And then they couldn't recover, by the time you get the net earnings, the damage had already been done.

915
01:03:28,000 --> 01:03:31,000
Earnings before taxes, there it is.

916
01:03:31,000 --> 01:03:36,000
By the way, for earnings before taxes, you'll hear me use the term pre-tax.

917
01:03:36,000 --> 01:03:40,000
That's what we say in finance, pre-tax.

918
01:03:40,000 --> 01:03:45,000
So moving along here, yeah, that's where the blood is.

919
01:03:45,000 --> 01:03:55,000
Now if we want to do a quick look over here, a looky over here, their liquidity...

920
01:03:55,000 --> 01:04:03,000
Their cash has gone down, their inventories have been reduced, and their...

921
01:04:03,000 --> 01:04:06,000
Yeah, so they've lost some liquidity.

922
01:04:06,000 --> 01:04:08,000
You see that?

923
01:04:08,000 --> 01:04:10,000
These are liquid assets.

924
01:04:10,000 --> 01:04:13,000
So their liquidity has slipped a little bit.

925
01:04:13,000 --> 01:04:15,000
Looking at...oh, there it is. Look at that.

926
01:04:15,000 --> 01:04:18,000
See that? That was what I said, it looked like they had some new investments.

927
01:04:18,000 --> 01:04:23,000
That's what caused that depreciation expense to go up somewhat.

928
01:04:23,000 --> 01:04:25,000
See how they've gone up.

929
01:04:25,000 --> 01:04:27,000
Intangibles.

930
01:04:27,000 --> 01:04:29,000
I mean, okay.

931
01:04:29,000 --> 01:04:32,000
Goodwill.

932
01:04:32,000 --> 01:04:39,000
So the balance sheet has shown some evidence of loss of liquidity in the short term,

933
01:04:39,000 --> 01:04:46,000
and some more intensive capital investment in the long term.

934
01:04:46,000 --> 01:04:48,000
This is what we do.

935
01:04:48,000 --> 01:04:50,000
This is financial analysis.

936
01:04:50,000 --> 01:04:57,000
And I like to do it this way so that we can see better...

937
01:04:57,000 --> 01:05:00,000
Let me...now let's look over here.

938
01:05:00,000 --> 01:05:03,000
Let's look at our total current liabilities.

939
01:05:03,000 --> 01:05:04,000
Payroll.

940
01:05:04,000 --> 01:05:09,000
They have reduced payroll a little bit, which helped cash flow, free cash flow.

941
01:05:09,000 --> 01:05:12,000
Current liabilities go down, free cash flow goes up.

942
01:05:12,000 --> 01:05:14,000
I'm sorry, I got that wrong.

943
01:05:14,000 --> 01:05:18,000
Current liabilities went down, so free cash flow went down.

944
01:05:18,000 --> 01:05:20,000
God, I can't even do my own stuff.

945
01:05:20,000 --> 01:05:22,000
In other words, they're paying bills faster,

946
01:05:22,000 --> 01:05:28,000
which means that they are absorbing cash, they're losing cash doing that.

947
01:05:28,000 --> 01:05:31,000
Crude taxes, they've paid more taxes,

948
01:05:31,000 --> 01:05:35,000
so that's hurt their cash position a little bit there, too.

949
01:05:35,000 --> 01:05:39,000
Leases will down a little bit.

950
01:05:39,000 --> 01:05:46,000
They've increased their short cycle of their long term.

951
01:05:46,000 --> 01:05:49,000
That's the coupon payments that are due now.

952
01:05:49,000 --> 01:05:51,000
You have your long term liability,

953
01:05:51,000 --> 01:05:55,000
but then the part of it that's due right now goes into current liabilities,

954
01:05:55,000 --> 01:06:00,000
and that's gone up, so that opened up some free cash for them.

955
01:06:00,000 --> 01:06:03,000
Long term.

956
01:06:03,000 --> 01:06:06,000
They've borrowed a little bit.

957
01:06:06,000 --> 01:06:14,000
They've dropped their employee benefits, lowered them.

958
01:06:14,000 --> 01:06:18,000
Deferred taxes a little bit up.

959
01:06:18,000 --> 01:06:24,000
I mean, this is just bad.

960
01:06:24,000 --> 01:06:29,000
So if we look at their total assets really quickly,

961
01:06:29,000 --> 01:06:33,000
their total assets have increased,

962
01:06:33,000 --> 01:06:39,000
and that was the net effect of losing short term liquidity

963
01:06:39,000 --> 01:06:44,000
but increasing long term capital investments.

964
01:06:44,000 --> 01:06:47,000
So their total assets have gone up a little bit.

965
01:06:47,000 --> 01:06:57,000
But if we look down here, one last thing, quick look at retained earnings.

966
01:06:57,000 --> 01:07:01,000
Their earnings have actually increased.

967
01:07:01,000 --> 01:07:04,000
Now why the hell would they have increased?

968
01:07:04,000 --> 01:07:07,000
Now we'd have to look.

969
01:07:07,000 --> 01:07:11,000
I don't have that much, I have many more years in my life.

970
01:07:11,000 --> 01:07:16,000
But the balance sheet all told the way I would read it.

971
01:07:16,000 --> 01:07:20,000
Now you might be a little different, and I do allow for some of that.

972
01:07:20,000 --> 01:07:24,000
But I'm seeing that balance sheet that's fairly stable.

973
01:07:24,000 --> 01:07:29,000
It's not perfect, but it seems to be fairly stable right now.

974
01:07:29,000 --> 01:07:34,000
And that, of course, is more of, remember the balance sheet is a snapshot

975
01:07:34,000 --> 01:07:36,000
at the end of the period.

976
01:07:36,000 --> 01:07:41,000
And the snapshot at the end of the period is showing that they're at least not

977
01:07:41,000 --> 01:07:49,000
in long term trouble, although that income statement worries me.

978
01:07:49,000 --> 01:07:52,000
And then the statement of cash flows.

979
01:07:52,000 --> 01:07:55,000
See, this is where you add back, you start with this much cash.

980
01:07:55,000 --> 01:08:00,000
You add back that depreciation and all that, which really wasn't cash flow,

981
01:08:00,000 --> 01:08:05,000
it was just there for the, and then you go through all these.

982
01:08:05,000 --> 01:08:10,000
Notice that your current receivables have gone up.

983
01:08:10,000 --> 01:08:14,000
That is a drain on cash.

984
01:08:14,000 --> 01:08:19,000
Because you said I got this much revenue, but some of that wasn't actually cash.

985
01:08:19,000 --> 01:08:23,000
So that went up, so that decreases free cash flow.

986
01:08:23,000 --> 01:08:26,000
And then inventories.

987
01:08:26,000 --> 01:08:29,000
How the hell?

988
01:08:29,000 --> 01:08:31,000
Oh, well that's interesting.

989
01:08:31,000 --> 01:08:37,000
They got rid of inventory and didn't replace it, which would free up cash.

990
01:08:37,000 --> 01:08:43,000
See, if you got inventory and you buy more than you sold, that increases your inventory.

991
01:08:43,000 --> 01:08:48,000
But if you sell more than you bought, bought, buy, then that will decrease inventory.

992
01:08:48,000 --> 01:08:52,000
So their inventories were actually negative.

993
01:08:52,000 --> 01:08:54,000
Their inventories went up.

994
01:08:54,000 --> 01:09:00,000
Now here's the one that's going to be important to us, is capital expenditures.

995
01:09:00,000 --> 01:09:02,000
This is the actual money that went out.

996
01:09:02,000 --> 01:09:05,000
Depreciation, no.

997
01:09:05,000 --> 01:09:06,000
Capital expenditure.

998
01:09:06,000 --> 01:09:12,000
It was like I gave you in the last lecture when I spent $4,500 on a new piece of equipment.

999
01:09:12,000 --> 01:09:23,000
I'm allowed to get rid of, say, minus $900 for five years instead of minus $4,500 right up front.

1000
01:09:23,000 --> 01:09:27,000
So those capital expenditures, you notice that there's that new investment.

1001
01:09:27,000 --> 01:09:29,000
You see it there?

1002
01:09:29,000 --> 01:09:32,000
Now I'll caution you that on here it's a negative.

1003
01:09:32,000 --> 01:09:39,000
But in a calculation we're going to do on Wednesday, it's actually you need to get rid of that negative.

1004
01:09:39,000 --> 01:09:41,000
Because you're subtracting it.

1005
01:09:41,000 --> 01:09:43,000
You don't want to subtract a minus.

1006
01:09:43,000 --> 01:09:49,000
So you use the Excel function ABS, absolute, for minus capital expenditures.

1007
01:09:49,000 --> 01:09:53,000
Okay, so looking around, financing activities.

1008
01:09:53,000 --> 01:09:58,000
Didn't really do much on these.

1009
01:09:58,000 --> 01:10:04,000
They increased their long-term debt by $241 million.

1010
01:10:04,000 --> 01:10:06,000
And they got rid of $89 million.

1011
01:10:06,000 --> 01:10:12,000
So the net effect, and they bought some stock.

1012
01:10:12,000 --> 01:10:15,000
No, they actually sold some stock.

1013
01:10:15,000 --> 01:10:21,000
But anyway, now that we have taken a lay of the land, we've done our recon,

1014
01:10:21,000 --> 01:10:26,000
then we can just haul through on Wednesday and do all of the ratios.

1015
01:10:26,000 --> 01:10:36,000
For now, that's all I have for you. I thank you.