Alan Kring Productions and Association with Emergent Light Studio presents
the Illinois State Collegiate Compendium, academic lectures in business and economics.
This is Business Finance, FIL 190 for spring semester 2024.
Today, Financial Statement Analysis.
And this will go to some good degree toward your construction of a chat GPT.
Because the technical part of the analysis is just grinded out arithmetic calculations
and a little bit of algebra along the way.
And it is just wonderful bait for a chat GPT to crank those out for you.
Of course, Excel can do it too.
But also, even in the ratio analysis, where you take one number in the account of the statement
divided by another, it can help you make observations about, if you construct it properly,
it can even help you make observations about changes, what the ratio is compared to the industry standard,
and what the trend in it tells about the company.
Now, the one thing that you will find is that you still have a brain.
And that means that when you get one of these GPTs, especially, to do an analysis for you,
you can do a lot better than a GPT.
Now, understand that I've said this before.
Chat GPTs are the hillbillies of artificial intelligence.
They are the low level, the narrow AI.
Now, the broad AI we've got right now, and it can do a lot more,
but it takes insane computing power, which we have to a certain extent.
And then, unfortunately, about 20 to 50 years down the road, we get to general AI,
the connected planet, the connected solar system, as it were.
So then it will probably be able to whip our butts really good at any kind of analysis at all.
But even the broads are pretty good.
But when you're in a chat GPT, it's going to do pretty good on analyzing,
but you can add to it, or maybe even do better.
So keep in mind that when I'm going through today and on Wednesday,
the fundamental analysis and the technical analysis.
But before we go to that, we're going to have a look at the numbers right here today.
And just as a look at them, it's kind of a mess, but what would you say?
Is this a bull day or a bear day?
Sorry, bear.
I was going to say, wait, what?
Let me focus on it.
I've got cataracts, but they're not that bad now.
That's cool. You're good.
But I mean, of course, it's not a spectacularly bad day,
but it is a little bit on the spooky side.
You see this drop off.
This is a cliff, but it looks like it's leveled off, at least for a while.
It's mostly from what I can read.
I had a quick conference call with a couple of traders this morning
who were former students of mine.
It was about other things, but they didn't see anything
that would really spook the markets like this.
It's more like a correction kind of environment.
There's all this giddiness.
Let me show you something here real quick.
Remember I talked about volatility, vol.
Now, here's something that is worth,
and sometimes Yahoo keeps this on their summary board, but not today.
The volatility index.
Well, actually, I wonder which one I...
I could look at that one.
Oh, hello kitty.
Okay, that one's a little scary.
This is a volatility index, CBOE, Chicago Board of Options Exchange.
And remember, volatility represents risk.
It is uncertainty.
There's more volatility if there is disagreement on where things are going,
and things here means the markets.
And as you can see, it's up rather seriously right now, the CBOE volatility index.
So that tells us that...
Notice here, look here.
Really quick.
Now, you're saying, wait a minute, fat boy, this thing is 3 a.m.?
Oh, yeah, this is an options exchange, so it doesn't trade in the same way
that you're opening bell, closing bell during regular working hours.
Notice how it just started to plunge, rose, flatten, everyone kind of dusting themselves off.
Then it dropped off a freaking cliff.
Volatility index going down, and now we've got a spike from hell going on.
Now, the volatility has volatility, and when you have the volatility having volatility,
that's a lot of volatility.
So that tells you right now there is uncertainty.
It's not any one thing that's scaring the markets.
It's which way are we going kind of volatility, kind of uncertainty.
And that will depress prices of securities.
Stocks will get really spooked in a market where there is volatility.
Higher risk, generally inequities in stocks, common stocks, means that the price goes down.
And you'll see why that relationship is there as the course proceeds.
It has to do with the uncertainty that embeds in interest rates.
And when interest rates go up, prices go down.
So that's the driving force.
Uncertainty risk is articulated into the economy, into the markets, through interest rates.
And when interest rates go up, that in general will bring securities prices down.
Why? Because the net present value of future expected cash flows goes down.
We'll see all this as the course goes along.
And I put these out there, not so that you can remember right now,
and say, oh, God, I've got to remember that, write it down, memorize it.
No. I keep talking about it.
And it gets inside your skin and gets into your blood.
And that's when you are becoming a professional in finance,
whether it's investments, corporate, real estate, entertainment finance, financial planning, whatever.
Now, let's go back to the main board there.
Now, that thing has freaked me.
Now, notice here that remember what I told you about flight to quality.
Flight to quality is when investors are moving in herd from riskier investments to safer investments.
And that would mean here that we have what looks like maybe a flight to quality.
Investors are getting out of stocks.
Selling the stocks, supply of stocks goes up in the market maker's book.
Prices drop, so the market makers can get rid of the inventory.
So what we would say is, OK, if investors are getting out of stocks,
then they probably are going and buying bonds.
So that would increase the demand for bonds, driving the prices up and the yields down.
Let's run over here and see if that's what's going on today.
Yields are going up, so the prices are going down.
So where the frick is the money going?
It went from stocks and it certainly didn't go to bonds because bond prices are dropping.
So, OK, from stocks to bonds, stage one, flight to quality.
From bonds to gold.
Well, spank me Jesus, that's going down too.
So where is that money going?
No, it's not going to bullets.
From stocks to bonds, bonds to gold, gold to bullets.
Where is that money going?
If they're bailing out of stocks, they're bailing out of bonds,
they're bailing out of the metals, where is it going?
What do you say?
It's OK, it's OK.
Try to think.
This is your first course in finance.
What do you say? Where is it going?
Let me ask you this, do you go to sleep at night?
I do.
Where do you go to sleep?
In my bed.
What is on your bed that you sleep on?
A blanket, pillow, mattress.
Mattress!
Oh, that's right.
It's going under the mattress.
It's going to cash.
That's where it's going.
They're in the money markets, into the money market funds.
They're parking it, waiting to see what the hell is about to happen.
You see, they want liquidity.
Cash is highly liquid, of course, obviously.
So they want the liquidity and they want to hold it in some things
that they can get back in quickly.
Because right now, there's a lot of volatility.
There's a lot of uncertainty.
And so, you wait for a clearing.
You wait for, as we used to say in the service, you wait for your shot,
your patient.
You just get it away and then in a safe place under the mattress,
you turn it to cash, money market, and other such securities,
other such instruments, and then when the time is right,
you can jump back in very quickly.
That's the scenario that's picking up right now.
It's nothing to be scared about, but it's...
Now, if investors were really, really concerned,
they'd be moving into bonds, but they're not.
If they were really, really concerned,
they'd be moving into gold or to other metals.
They're not.
So that would tend to mean that they are not long-term bear.
They're just short-term, get the hell out of the way of the tornado
that's coming through, and then have it someplace where you can pull it
right back out and get back into the game.
That's how you would think about this.
Now, am I right?
We'll see.
I'm usually right.
I'm right more than I'm wrong, but boy, when I'm wrong,
I am spectacularly good at being wrong.
Coming back over here real quick.
Let's have a gander at a few other things here.
Oil.
Look at that.
Oil is dropping.
It's gone below the 72-79 band.
Now, is it going to stay there?
It seemed to like to find that again, but for right now, oil has gone down.
It was up as far as 77, a barrel on the light-suite Brent, Brent light-suite,
and now it's gone clear down to below 72.
So there's some vol in that market right now, in the oil market,
but it's mostly on the downside.
The high seas are flush with oil.
The ports are open that can take the tankers, even the VLCCs,
the very large dirties, and they call them dirties because once it's used for oil,
it's dirty.
It can't be used for other things.
So the very large, those ginormous things that look like small cities floating
around in the ocean, they're full of oil.
The supply chain is flush.
So it's a good time, and you might even see the price of gasoline go down a little bit,
a notch, down around here maybe to $2.99, $2.95 a gallon up in Chicago.
It'll make it below $10 a gallon.
That's a joke, but anyway, okay, to hell with that.
Why don't we go over here, have a look.
Now, notice that Tokyo was wavy, and it wasn't a spectacularly positive day.
It was up a half a percent, nothing to sneeze at.
Apparently, there wasn't any kind of worry late last night.
But then today, when you get over to London, it started out kind of volatile.
London has been volatile for some time now.
It just seems to have more bounce up and down.
But it finished just a notch down.
Do you see how the concern was beginning right about there,
and it started a pretty strong, deliberate trend downward and ended the day
just a tiny bit below where it started the day.
And then the sun was, it's still, I believe they're still trading over there right now.
It's near the end of the day.
But do you see how whatever started over there with concerns really got underway over here?
And you can see that this is not just a United States thing.
Apparently, there is a concern going across the globe right now.
It wasn't there last night in Tokyo.
You can't see evidence of it.
But you do see the evidence happening about midday over in London.
And it's continuing over there.
And when the sun rose here, it just, that same concern carried itself with the sun rising here.
That's about all I can say about it.
Now, I'll show you what happened.
On Friday, I decided, okay, I'm going to take a position in options.
And I'll teach you a little about options as the course goes along and other derivatives.
It's a bet on prices going up or down, above or below a specific price.
And I decided I'm going to go PLTR on Friday.
Unfortunately, my trade didn't get executed before the closing bell.
So the order was open this morning to grab it at 91 cents a share.
And unfortunately, it was, that didn't work out.
It was spiked and I had just canceled out.
Okay.
So the next thing I decided to do, Micron Technologies.
Spiked up at the beginning and then it started dropping off.
And I am, that order executed.
And now, you see that right there?
That's my ass and I'm losing it.
Okay.
I mean, if I lose like this one for the day, what I'm hoping, look, the problem is here.
Do you see the descending tops?
You see the descending bottoms?
Yeah.
That's, it's headed for a place called hell.
And so I'm going to lose my butt on this one.
I might have, see if I can get the traders to sign, autograph the boot print on my butt at the end of today.
But anyway, okay.
One more, just one of my favorites, just having fun.
Oh, well, spank me.
Jesus, look at that.
It's going down even more.
They recall what?
Two million Teslas and it's just taking a beating.
And the mark, like I said, looked for somewhere between 90 and 80 as the floor for it.
So if you wanted to buy a put, this is a put.
You bet against the stock, against the specie, at a certain price.
If it goes below that price, the farther it goes below it, the more you make and it's magnified by 100.
For every dollar it goes down, it's, well, it depends on the delta and all that.
But anyway, so you can see that that one's not good.
Looking at a couple of other winners, Alphabet, Up.
Of course, they own the universe, so obviously it'll go up.
Oh, look at Google, slightly riskier than the market, a little undervalued, darn, darn nice EPS.
It's profitable, but they don't pay a dividend.
So you have to hope that the stock price will go up.
So a holding period return comprises two separate things.
One is the price going up, that's the capital gain.
The other is the dividend you get, that's the dividend yield.
You put those together and you get the total holding period return.
In this case, the total holding period return hinges on only one of those pillars because there is no dividend.
The only thing you'll make money on is the stock price going up if it's going to go up.
And there's no dividend to buffer the stock going down from where you invested it.
Another one, AAPL.
Up.
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.
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?
Yes, it is.
1.31.
So it's a risky investment.
It's not really undervalued.
That's close to 30.
So I don't foresee it, but notice you do have a kind of a little dividend on it.
It's a lousy dividend.
It's only a half percent on the price right now, 186.94.
But it's there.
You get a little bit, even if AAPL hits the skids, you got a little bit there.
But notice, look at that volatility.
That's that vol you saw in the CBOE index.
It's just a volatile stock.
And again, I just keep saying these things over and over again, and it kind of begins to sink in.
By the end of this semester, you'll be darn worthy traders.
Talk the big talk and set up in Chicago at the Cudoba right there in the financial district,
and people will think you're just one of the crowd.
Maybe not.
That kind of stuck up up there.
But anyway.
Now let me get down to the business of today.
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.
This should have been shown to you in Business 100, if you were here as freshmen.
However, most of the teachers are not finance, so they don't really emphasize this.
But what I'm going to show you is where you get the primary documents on financial information.
Any other place that you would get them would almost certainly have drawn its information from the documents I'm going to show you.
And so when you are doing term papers, research papers, this is where your first go-to, no matter what.
Not news sources, not Yahoo.
See, you can get the financials here on Yahoo.
You can get them on Google's finance.google.com.
You can get them there, but all they're doing is pulling them from where I'm going to show you they start.
And that's important because in some of these, as I mentioned I think in the last lecture,
sometimes their systems glitch and they don't get a feed, so a number is missing.
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.
But if you go to the SEC, those numbers are where the companies file their financial statements and a whole lot more.
And I'm going to talk about that a little bit here before we go into those.
But know this, these are available 24-7 to anyone in the world who wants to go to the SEC site.
They use a system called EDGAR.
Now, when I started consulting many, many, many years ago, there were not a lot of people who had computers.
Certainly the government had computers, but they were not in general use.
So back in that time, we filed information documents in triplicate.
We mailed them in. We prepared them and mailed them in.
Where I had an EDGAR was that I was a computer nerd.
And so I knew how to use, there was a spreadsheet that was very popular at the time called Lotus 123.
And I used that and I used word processors.
The big one back then was called WordPerfect. It was awesome.
Word sucks compared to what that thing could have been if Microsoft hadn't wiped it out.
But anyway, we filed them that way.
Then it was in late 1980s, I believe.
The SEC began a pilot program where public companies could file their documents electronically.
There was not the internet that you know back then, but there were intranets and internets in that time period.
They were just all text on a black screen and all that.
But the SEC set up a program called EDGAR.
And you could send the data through that.
You set it up with these tags that were called SGML, Standard Generalized Markup Language,
which eventually became HTML, which was the basis of webpages.
But you'd have title, company name, slash title.
And then you'd go all through it and then you could push a button and file it.
And once you got the hang of it, once I got a boilerplate, I got it set up.
It was so much easier than doing them on paper and all that kind of stuff.
That became the EDGAR system, which is now the only way the companies can file.
I did it with EDGAR and I made decent money.
Companies would pay me to do this until the SEC finally cracked down on,
because the big accounting firms got involved in it, they said,
you've got to ban these small time players, so the SEC, going with the big dogs,
actually made it illegal for me to file EDGAR statements after a certain period of time.
So they can bite me.
But anyway, let me show you this.
SEC.gov.
It was a long period of time when I was a little reticent to go to this site.
Now, you go to filings, company filing search.
Now, you could type in a company name, but that can be a little bit perilous,
because you could have more than one company that has that name.
Watch this.
Suppose if I type in Sears.
Okay.
There are a lot of them.
It's better if you type in a trading symbol.
Now, there's another thing you could type into.
It's called a CIK.
It's a numerical identifier unique to a security.
This stock has a CIK.
This bond has a CIK.
So if you know those, you could use those, but who knows those?
Use a trading symbol.
And I'm going to do this one.
United States Steel Corporation.
Oh, Edgar is being difficult today.
Yes.
There we go.
United States Steel Corp.
Now, let's talk.
You need to know this.
A public corporation is required to file a number of different documents.
There is form this, form that.
Now, the ones that are the most common that you would know,
that you will know like the back of your hand as finance people, are these.
The form, and again, I've got the wrong, who thought of this?
The form 10.
Now, there's a form 10Qs, or sometimes you'll see a dash in there,
in the form 10K.
The Qs are quarterly, and they accumulate to become the annual K.
We call them the Ks and Qs.
These are the reports of the company and its financial condition.
It is words, and it is numbers.
And as I said before, back in the day, these were not particularly reliable.
Companies lied. They misstated.
And some of them, they had auditors who would rubber stamp them,
lawyers would rubber stamp them.
The executives of the company were too important and busy to look at them,
and lots of bad things came out of it.
And finally, it got to the point of some major scandals involving companies
like Enron and Worldcom and all that.
And the SEC cracked down.
Well, Congress cracked down, and the SEC moved forward with regulations about it.
That was Sarbanes-Oxley, which required that the officers
and director personally sign those, personally sign them.
Because if there was a material misstatement of fact,
then the SEC could levy civil fines against the corporation
and against the officers and directors.
And if it was egregious enough, then they could refer it for the matter
for criminal prosecution to the Department of Justice.
And so that means that the officers and directors could end up not just paying fines,
they could go to prison for what they were doing, if they were lying.
So that got us to the point where we had a lot more assurance.
Because after Enron and Worldcom, the markets,
where do we know that we've got truthful information?
That was why Congress stepped in and why the SEC moved as rapidly as they did
to enforce, to make regulations around the laws, so that we had that confidence back.
So we can rely on these statements.
That does not mean that there are not times when something could be done wrong.
Almost all the players in the business are as ethical as they simply must be.
And if their asses are on the line, then they're the most ethical people you'll ever meet.
But that doesn't mean, for example, Elon Musk.
His company, he has materially misstated facts in his SEC filings.
He's been fined, he's been threatened, and what does he do?
He goes on Twitter and uses foul language about the SEC.
So it's only as reliable as the people who are preparing them.
But it is highly reliable because, like I said, almost all corporate executives
and auditing firms and law firms, they want to do it right because they have to do it right.
Now, the 10K and the 10Q.
Another one that I'll bring up is the Form 8K.
Now, these are periodic.
Form 10Q, every quarter.
Form 10K, every year.
Now, there's another one, the Form 8K.
This is a report of a non-recurring event.
These can be filed several times, more than several times a year.
Okay, let me think.
You, sir, you are the chief financial officer of Megacorp International.
You were just abducted by aliens.
That's a Form 8K right there.
The chief financial officer was abducted by aliens.
You file it with the SEC because the investors want to know.
Okay, now they return you two weeks later, and let me tell you, you are a changed man,
but they bring you back.
So there's another 8K filing right there.
You, sir, you were fired as the CEO.
That's a Form 8K, and I can see why they would.
A Form 8K, okay?
Anything that is a material, and you understand this is where the investors can get solid information.
In fact, it doesn't even have to be something you would think of.
Back in my time, I made a lot of money filing Form 8Ks for these little podunk companies.
They wouldn't tell me they were going to do it, but they'd make some press release.
Our disruptive technology is on the verge of production.
Stay tuned.
One after the other, pump and dump.
They would pump it up, and then their window on the Rule 144 sock would open.
They'd sell, dump out, and I'd say every time they did this, they'd tell me afterwards,
I'd say, well, I've got to get an 8K out for you.
Are you sure?
Well, you can go to jail if you want.
I'm going to step out of the way and send an advisory letter to you doing this
telling you that you should have or you should file an 8K.
So my butt's covered, and you decide, do you want me to file an 8K,
or do you want to save yourself 40 bucks and not?
Back then, this was in the 80s and 90s.
Okay, so the Form 8K is just something to keep an eye on.
You know, they say, oh, they've filed Form 8K.
You open it up, and sometimes, well, I just saw that in the news.
I mean, they watch these 8Ks.
The heavies watch these all the time,
and they try to get in front of even the filing of the 8K to announce it on the news.
So a lot of times you say, oh, well, I just saw that in the news.
But once in a while, something, you read it carefully,
and it will say a little more than the news has caught up, caught.
So anyway, that's something to look at there.
Now, let's take you over here.
Watch what I do.
I'm going to look for 8Ks, for the 10Ks, rather.
Now, notice that under the K, you also got the Qs.
But I'm going to grab for the last K that they filed.
Oh, look at this.
US Steel just filed an 8K.
That means it's fresh meat.
Now, let's go in here, and I'm going to click the box.
Don't click the hyperlink like this.
Click the box link, filing.
Now, first things first.
This is, we're going to go ultimately to this blue interactive data.
Before we go there, this is the electronic equivalent of the paper document we used to make.
They create the document, and then these are the hyperlinks by reference that are in the 10K.
So in other words, there would be a link to each of these exhibits within the 10K.
It's a little bit old school now, but it's still pretty cool.
But let's look at this little thing right here.
This is a 10K, and it looks just like the ones we used to file,
except that we weren't allowed to use colors and little logos.
Back in my time, they would have hanged me if I put pretty little pictures in it.
But this is the 8K.
Let me show you how long an 8K is.
And on, and on, and on.
We're going to get down to it about when Jesus comes back.
But down here at the bottom, the reason I drag it clear down here to the bottom, well, geez.
Do you call that the 40 bucks?
No, that was the 8K.
This, I charged out the ass $500.
But I made it look like I was the martyr of the century.
Oh my God, I'm charging.
I had it down in the computer templates back in WordPerfect.
And it load as one, two, three, and I'd copy and paste, copy and paste.
It was actually about two days of work for me back then.
Okay, look at these.
These are electronic signatures.
Oh, look at this.
All these signatures.
These are the fellows and ladies who would go to jail, get fined and go to jail if they lie.
Okay.
Well, now we can go back through here.
See, those are those hyperlinks, see them, that jump you to the other documents in there.
Now you're saying, well, what about these financial statements, fat boy?
Do we have to look at them here?
Absolutely not.
But I do want to show you something.
There is one section of this which is really important.
If you are doing research for a term paper, for investment purposes,
for your interest in getting a job with a public company, let me take you clear up here to the top
so I can use the link up here.
Item seven, management discussion and analysis of financial condition and results of operations.
We call it the MD&A, the MD&A, management discussion and analysis.
Now, this section is where the company tells the story of the numbers.
It goes through and they are surprisingly glib, in other words, straight up about what's been going on with them
in terms of where the ratios are going, where the numbers are going, why they're doing this,
competitive issues of the company, possibilities of lawsuits and all that kind of stuff, all in here.
And it goes on.
They show little miniatures of the financials, snippets from the financials.
On and on they do this.
This is just begging.
You can say in a term paper, you can just highlight and copy and paste.
This is in the company's documents.
I didn't find this in Wikistupedia or Investopedia.
I didn't find this in some news article.
This is the seminal document, the primary document in which they said.
So you don't have to give opinions, at least certainly not before you look at what they have had to say about it.
Look at all this.
And it is, they got pictures, you can even copy and paste the pictures.
Be sure to cite your source.
Source, 10K, 2023.
So no one can dispute that this is authoritative, unlike any other place that you can get the data or the graphs from.
But wait, there's more.
Okay, you've got the MDA, MDNA.
Let me get out of this and we're going to go back to that.
I'm really, okay.
Let me go back to it this way, finally.
Remember I told you about that blue, it's in the upper left side, interactive data.
First things first, click on it.
And you will see that you can see summaries of all of the financial statements right here.
Income statement balance sheet, all that kind of stuff, right here.
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.
This is nice, interactive.
But view the Excel document.
This is every financial statement of the company.
Close.
Enable.
Will you quit it?
Okay.
It starts out with a cover page.
Now here's an interesting thing.
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.
Look at this.
You get all this information right there.
There is no better source than this for just the basics.
Now let's go over here.
Consolidated statement of operation.
Oh, well, let me do this.
You want to see financial statements.
Each one of these tabs is a financial statement.
And on.
And what the?
Oh, well, look at all that stuff.
And I guarantee you, you really don't have to.
But if you ever want to win at financial jeopardy, here it is.
I'll take you a steal for $500, Alex.
But anyway, let me take you back here.
Excel.
We're not going to do anything really fancy with Excel, but there are a couple of things that are just common workplace practices.
If I could never get back to the beginning here.
Really?
Okay.
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.
For basic analysis.
Now you could also do the statement of retained earnings here, but we can dig that out from these other ones.
Retained earnings.
These are the ones you want to locate them and scoot them over next to each other.
You want to get them all together.
And this is normal for even a manufacturing work environment.
You shape your work environment in the way that will be the most efficient for you.
And this one, okay, we've got the statement of operations.
That's the income statement.
Now, there's the balance sheet right there.
So I want to scoot that one over so it sits next to...
Well, I thought I did, but I still didn't get it quite over far enough.
So, come on.
So I'm going to put that one beside the income statement.
Okay, now the last one, I'll find the statement of cash flows.
There it is.
So I'm going to shuttle that one over so that it is next to the balance sheet.
And now you've got the three that you're going to need to work with all next to each other in this mess.
Do that.
Now, there's another.
This is part of when you say, I know Excel.
These, you would be expected to know these just automatically.
One thing that you will definitely want to do is create a calculation sheet.
Just between these two, I usually do it, insert a worksheet and call it calculations.
This keeps your calculations from getting in the way of the core financial statements.
Many are the horror stories of the primary worksheets in some company's Excel file.
And some idiot goes in and starts doing back of the envelope calculations
right smack in the middle of a primary sheet.
And you don't want to do that.
You want to put them over on the side where they are not going to interfere with the actual data itself,
with the primary data.
And there's another reason for this too, is that on the worksheet,
you have the ability to shape what the end user sees.
When you have a pile of important sheets,
you don't want to show all of those in a meeting.
You want to show what the results are.
That's why you don't want them to be, well, I got it here on the income statement.
We can look at this side calculation I did here.
Well, let's swing over to this and they're seeing all of this data
instead of the results, which is what you're supposed to be talking about in the meeting.
Now, if they want to see something, you can flip over to one of those sheets,
but you don't have to.
You do your side calculations here,
where they won't get in the way of everything else that you're doing.
Now, this is why you might even see me do a couple of these for the ratio analysis,
which is the subject of Chapter 4.
We can even have another worksheet ratios,
where you are just jumping and grabbing numbers from several of the different sheets
and doing the calculation on the ratio sheet.
That way, you're not worried about causing yourself to try to figure out,
well, I'll put the asset activity ratios on the income statement.
Maybe I'll put the liquidity ratios on the balance sheet.
We've got them all ratios in one sheet.
One more thing.
Back in the day, and I keep saying this because it's a good reference for you,
we had each line of each financial statement had a name that you were supposed to use,
and every line was supposed to be there.
You couldn't call things what you wanted.
You couldn't, well, we'll leave that out because no one uses that.
That's not the case anymore.
Now, in some cases, it's not, you know, you can figure it out.
But let me show you here, and I'm sure you're all really good at accounting now,
so you can see a line that's missing here.
It's missing in most companies' income statements.
Some still put it in, old school, but many don't.
Do you see the line that's missing here?
I'll give you a hint.
It's between rows three and ten.
Do you see the one that's missing?
Yeah?
It'd be EBITDA?
Nope.
Or EBITDA?
Nope.
It's gross income.
Revenues minus cost of goods sold.
It's not there.
We need it.
We'll need it for ratio analysis.
It's one of our ratios, a part of one of our ratios.
So we have to, so that's a little warning to you.
You want to put, you'll have to fix, this one you'll have to fix.
On line seven, you insert, and there you go.
So then we can have, now, they call operating expenses,
cost of goods sold is an operating expense.
It's not.
So we're going to put in gross income.
And gross income is merely your revenues minus your expenses.
Equals revenue minus expenses.
And then we haul that little mother over.
Whoops, didn't mean to do that.
Try that again.
Grab it.
I should do this with a keyboard.
You're not cool if you use the mouse for this,
but it's better for you to see it if I use the mouse.
And there's, so you have your gross income put in there.
I had to put that in.
Now I'll show you another line here they put in that you
probably won't see in most financial statements,
interestingly enough.
Depreciation and amortization.
They put it in.
Most companies don't put it in.
And some of them lump it in with SG&A,
selling general and administrative expenses.
But some of them, it's just like magic.
They use it for the calculations,
but they don't actually put it in there.
So anyway, good grief.
You are right though that, good grief.
Okay, earnings before interest and taxes.
Now let me give you something.
EBI, earnings before interest and taxes is only one of the
names this could have.
Another name it could have is operating income.
That's another name that it could have is operating income.
It could also be called EBIT.
So in other words, where the hell was it?
There it is.
Earnings before, that could be called operating income.
Yeah?
Huh?
EBIT.
Say it again.
EBIEA.
No, EBITTA.
Oh, no, no, no.
Oh, I'm getting to that one.
I'm getting to that one.
EBITDA is earnings before taxes, depreciation, and amortization.
Now that line isn't in here and it's very rarely in here.
What you would do is if you wanted EBITDA,
you would take operating income and add back depreciation expense.
Then it would be earnings before interest and taxes
and depreciation and amortization.
So I could put that in here.
I'm going to take it out because that will really confuse me and I'm old.
Okay?
But you could say earnings before interest
and interest and taxes and income taxes.
Was that a fart?
No, that was my shoe.
I'm so sorry.
Good, good.
Okay, we're cool.
We're good.
I thought he put a whoopee cushion under you or something.
I didn't know it was going to be that loud.
Depreciation and amortization.
Now I'm going to take this one back out here,
but I will show you.
And amortization.
Because the book does mention this one a couple of times, amortization.
And that is EBITDA.
Okay?
And that one, what it does is it takes equals this one
and it puts back the depreciation and amortization.
Now let me point out something here.
There are some people...
Do you like pork?
Yeah, pork is good.
I have a smoker.
I can smoke a pork butt this big.
And let me tell you, if you don't have atherosclerosis,
you will after my pork butt.
Okay?
Now, are you a pig farmer?
No.
Good.
We smoke pork butt.
The accountants are the pig farmers.
And I should not have said that.
That came out.
It's Asperger's syndrome.
Does that do well by me?
Okay.
Look, they create these numbers.
We have to do things to them.
But this is not our wheelhouse.
We just step up to the wheelhouse and say,
can you bring us a loaf of bread from that grinding mill thing
that you have in the wheelhouse?
You see, we do have to fix numbers.
We have to use these numbers and work these numbers around.
But if you're saying, oh, God, is that what this course is about?
Oh, God, no, no, no.
It's like I said, when I teach accounting,
I have to think about do I want to do this
or do I want to just kill myself?
But we do it.
It's just a necessary evil in our world,
is that we have to do these kinds of fix-ups
and pretty the thing up.
Now, I'm going to take this line out right now
simply because it's going to drive me crazy having it in there.
Because it's not necessary to our financial analysis.
The book mentions it, and I will too, once in a while.
And companies, there are some companies, EBI TDA, EBI TDA.
But that's neither here nor there for us.
But anyway, okay, we're ready to roll here
on some more important things.
But this shaping of these sheets so that they are usable by us.
This goes back to my first lecture.
We are constituencies.
We are consumers of information products
that are created by accountants.
But we are a kind of constituency where we have to...
that's not a final good for us.
What they're producing isn't a final good.
It's an intermediate good.
And then we have to bend metal on it,
as they say in manufacturing, to make it what we want.
That's important for you to appreciate
about what I'm doing here.
I'm preparing it to bend metal on this mess of numbers.
Now, just to jump into it and have just some fun,
we got...
Oh, I was going to say I got a blank sheet there.
I made that blank sheet.
We look at these.
Now, you notice you've got a couple of years of data.
The balance sheet is going to sort of restrict us.
We can put another year of numbers in there from the 10K,
if we want.
But I'm not going to worry too much about that now.
And we got our consolidated...
Did I move over?
Yeah, I got the statement of cash flows.
There it is.
Statement of cash flows.
We got the balance sheet.
And we've got the calculations.
And we got our income statement, statement of operations.
Now, there, income statement.
It used to be called the income statement.
Some people call it the profit and loss statement.
Now they can call it the consolidated statement of operations.
They can call it a lot of different things.
They all mean the same thing.
But so you have to be a little flexible
in the terminology these days about this.
Now, a couple of just quick little terms,
and then I'll do some breakdowns here.
The first thing is that we have our gross income.
That is how much was left after wholesale.
So out of them pulling in $18 billion last year,
$2.25 billion survived their wholesale costs.
Now, we'll do a ratio that will tell you how many cents out of every dollar.
It's called a gross margin.
But that is...
Sometimes people who are not in the world of business
talk about these ridiculous profit margins and all this.
Look right here.
This is U.S. Steel.
And out of the $18 billion,
only $2.25 billion survived their wholesale costs of that steel that they make.
That tells you this is not unusual for that margin to be thin, as we say.
It's a thin gross margin on this.
Now, this one, you'll hear me use the term SG&A.
Selling General and Administrative Expenses.
It used to be broken down.
Wages, mailings, meals and entertainment, travel, utilities, all that kind of stuff.
They don't do it anymore.
You'd have to go to the notes to see the pieces of it, the parts of it.
That's why the notes are important.
If you want to see...
Okay, I see here...
Look at their...
By the way, notice something.
Even before we do the ratios,
look how their gross margin has been collapsing.
That's scary stuff right there.
Do you see it?
Do you see how the gross income, I should say, gross income has been tailing?
Compared to two years ago, it's less than half of what it was.
That's not a good sign right there.
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,
before you attack, look at it.
Like we did in the Army.
Before we go in and wage a fight, we do recon.
And that's what we're doing here.
We're just looking at it.
Just sit back.
Don't try to calculate things.
Just look at it with your eyes and let your minds notice what's going on overall.
This is important to us.
This is what we do.
This is why they pay us, is for us to go beyond the accounting and think about what we're seeing.
See, he got picked up by that UFO.
If he had just looked up, he would have said, that's a mothership.
He was in a pasture.
He and his friends were going to tip cattle, tip cows.
You know what that is?
You knock cows over.
They were there to pick up cows.
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.
Real problems for real people.
That's why they pay us, to think about that.
Anyway, we go down through here and we see down here, we're going to look at the earnings, net earnings.
Just look at them.
Is that a good story or a bad story you see there, sir?
Look at their net earnings.
Oh, I apologize.
First, let's lower the lights and then let's make these sheets bigger.
Net earnings.
What do you see?
Good.
Good?
You're looking the wrong way.
Okay, traditionally, most recent on the left, then to the right.
I apologize for warning.
Well, then it sucks.
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.
In this case, the technical term for what we see here is this sucks.
I mean, this is really bad.
Do you see it?
I mean, they are down, but the one thing that's interesting is notice something here.
SG&A actually went up, but that wasn't material.
That's not a big thing.
This isn't explained by cost cutting.
You can't say, well, we'll just cut costs.
Their costs have not gone anywhere.
So what else is going on?
They've got more depreciation expense, but that's not enough.
They've obviously done some investments, capital investments, and they've got more to depreciate now, but that's not enough to explain this.
Restructuring really hasn't done a damn thing.
So in other words, if I get down here, do you see where the blood is actually showing up at EBIT at operating income?
Do you see it?
Do you see where the damage is showing up first at EBIT?
Well, the only thing that I can see, revenues have slid, cost of goods sold has gone up somewhat against revenues.
Cost of goods sold has gone up against revenues.
The hell?
Wow.
Interest expense?
It's hard to call here.
Where in the hell did they take...
It has to have been the gross income.
So that means that it was a combination of falling sales and relatively increasing wholesale costs.
That was what caused the blood.
Now this is where we're doing...
We're actually looking at a murder scene and trying to figure out who done it.
And here, who done it, it was two killers.
One was falling sales, and the other was relatively rising, against those sales, rising cost of goods sold.
Those were the two culprits.
And then they couldn't recover, by the time you get the net earnings, the damage had already been done.
Earnings before taxes, there it is.
By the way, for earnings before taxes, you'll hear me use the term pre-tax.
That's what we say in finance, pre-tax.
So moving along here, yeah, that's where the blood is.
Now if we want to do a quick look over here, a looky over here, their liquidity...
Their cash has gone down, their inventories have been reduced, and their...
Yeah, so they've lost some liquidity.
You see that?
These are liquid assets.
So their liquidity has slipped a little bit.
Looking at...oh, there it is. Look at that.
See that? That was what I said, it looked like they had some new investments.
That's what caused that depreciation expense to go up somewhat.
See how they've gone up.
Intangibles.
I mean, okay.
Goodwill.
So the balance sheet has shown some evidence of loss of liquidity in the short term,
and some more intensive capital investment in the long term.
This is what we do.
This is financial analysis.
And I like to do it this way so that we can see better...
Let me...now let's look over here.
Let's look at our total current liabilities.
Payroll.
They have reduced payroll a little bit, which helped cash flow, free cash flow.
Current liabilities go down, free cash flow goes up.
I'm sorry, I got that wrong.
Current liabilities went down, so free cash flow went down.
God, I can't even do my own stuff.
In other words, they're paying bills faster,
which means that they are absorbing cash, they're losing cash doing that.
Crude taxes, they've paid more taxes,
so that's hurt their cash position a little bit there, too.
Leases will down a little bit.
They've increased their short cycle of their long term.
That's the coupon payments that are due now.
You have your long term liability,
but then the part of it that's due right now goes into current liabilities,
and that's gone up, so that opened up some free cash for them.
Long term.
They've borrowed a little bit.
They've dropped their employee benefits, lowered them.
Deferred taxes a little bit up.
I mean, this is just bad.
So if we look at their total assets really quickly,
their total assets have increased,
and that was the net effect of losing short term liquidity
but increasing long term capital investments.
So their total assets have gone up a little bit.
But if we look down here, one last thing, quick look at retained earnings.
Their earnings have actually increased.
Now why the hell would they have increased?
Now we'd have to look.
I don't have that much, I have many more years in my life.
But the balance sheet all told the way I would read it.
Now you might be a little different, and I do allow for some of that.
But I'm seeing that balance sheet that's fairly stable.
It's not perfect, but it seems to be fairly stable right now.
And that, of course, is more of, remember the balance sheet is a snapshot
at the end of the period.
And the snapshot at the end of the period is showing that they're at least not
in long term trouble, although that income statement worries me.
And then the statement of cash flows.
See, this is where you add back, you start with this much cash.
You add back that depreciation and all that, which really wasn't cash flow,
it was just there for the, and then you go through all these.
Notice that your current receivables have gone up.
That is a drain on cash.
Because you said I got this much revenue, but some of that wasn't actually cash.
So that went up, so that decreases free cash flow.
And then inventories.
How the hell?
Oh, well that's interesting.
They got rid of inventory and didn't replace it, which would free up cash.
See, if you got inventory and you buy more than you sold, that increases your inventory.
But if you sell more than you bought, bought, buy, then that will decrease inventory.
So their inventories were actually negative.
Their inventories went up.
Now here's the one that's going to be important to us, is capital expenditures.
This is the actual money that went out.
Depreciation, no.
Capital expenditure.
It was like I gave you in the last lecture when I spent $4,500 on a new piece of equipment.
I'm allowed to get rid of, say, minus $900 for five years instead of minus $4,500 right up front.
So those capital expenditures, you notice that there's that new investment.
You see it there?
Now I'll caution you that on here it's a negative.
But in a calculation we're going to do on Wednesday, it's actually you need to get rid of that negative.
Because you're subtracting it.
You don't want to subtract a minus.
So you use the Excel function ABS, absolute, for minus capital expenditures.
Okay, so looking around, financing activities.
Didn't really do much on these.
They increased their long-term debt by $241 million.
And they got rid of $89 million.
So the net effect, and they bought some stock.
No, they actually sold some stock.
But anyway, now that we have taken a lay of the land, we've done our recon,
then we can just haul through on Wednesday and do all of the ratios.
For now, that's all I have for you. I thank you.