Alan Cring Productions in association with the Emergent Light Studio presents
the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 240 for spring semester 2024.
Today, analysis of financial statements. As a preliminary, let's have a look at the markets.
Start out with some basics here. Simple stuff.
Is this a bull day or a bear day? Bear. That's right, it's a bear day.
Is it a...or is it...no, it's not down that much. I mean, it is a bear day though, yeah.
It's consistently all of the indices are down. I mean, though they really took a hit through the early morning.
I put $400 into a call option and I was down at $1.90 and then it rollercoastered back up.
I can't take this too much more. I'm getting too old for that aggravation.
See how it took a...it just took a toilet break. All of the indices did there at the beginning.
And then just before the midday, the bull started to come back up and started grabbing a hold.
Now, it still hasn't come back to even with the start, but it's a slow rise back out of the depths of despair that it had been in.
This is kind of an interesting day too because if you look, the Dow, which is supposed to be the calmest, the quietest, down a half percent.
But the S&P 500, which is supposed to be a riskier portfolio, is down only 0.12 percent.
And then the NASDAQ, which is supposed to be the riskiest, is down only 0.08 percent.
So it's almost...it is definitely kind of an inversion of the typical day.
The bad news hit the...the bigger the company, the bigger the bad news hit it.
But they're all recovering now. May finish today. I don't know.
It looks like, well, NASDAQ is about to break into positive territory.
It may end up one way or the other. It looks like it's going to end up being almost a flat day.
Now, crude oil, this one is the benchmark. It's been up and down.
That trading arranged 72 to 79. It actually touched below that briefly here around the midday,
but then it recovered back into the band, the lower end of the band.
So no problem, no risk of higher gas prices.
Matter of fact, we might over the next week or so see a little bit of a drop in prices of gasoline.
Right now, they're about 309 around here. You may see them make it down to 299.
And that means in Chicago they'll go below $10 a gallon. But that's just Chicago.
Now, you notice that the gold, it had a bad day. But here's what's interesting.
The 10-year bond yield was up today, which means the price was down.
So investors were getting out of stocks. They were getting out of bonds.
And as you can see, gold was down. They're not going to gold. So where in the heck is all that money going?
They sold stocks. They sold bonds. They didn't use it to buy gold. So there's not really a flight to quality going on here.
So what's the story? Where did the money go from the sales proceeds?
Well, the answer would be it's probably in money markets, cash.
In other words, it's being parked just for a while until a clearer view of what's coming next arrives.
So it's one of those days where it's like wait and see what's going to happen.
Now, really quickly here, what was I going to point out? Oh, let me show you something here.
I've mentioned this before, the term volatility.
Volatility is the ups and downs of a stock or of an index or a market, what we call vol.
The volatility is more volatility means more risk.
As I will tell you later, an informal definition of risk is the variety of outcomes that can occur.
So in other words, volatility is a measure of risk in a market.
The more volatility, the more risk a market has.
The more risk a market has, the lower stock prices should be.
Now, is there a way to measure volatility? Well, there are a couple as far as the market goes.
There's actually an investment you can make that is a bet on volatility.
Volatility goes up, you make money on it.
Volatility goes down, you lose money on it.
And one of them is VIX.
And it used to be Yahoo reported that in that little summary panel, but they don't these days.
But if you look at the VIX, the VIX vol is falling, which means risk is reducing.
So that would indicate lower risk should elevate stock prices.
I'll show you why that's true a little later in the course.
But right now you can see this is measuring volatility.
You see that spike earlier in the day, but then it's been skidding back down.
So that's kind of an interesting situation.
As volatility is lowering, that should get stock prices back up, which is what you're seeing here.
See how the volatility was falling through a lot of the day?
You see how the stock prices were recovering at the same time?
That wasn't a coincidence.
The uncertainty was sapping out of the market, which was giving the bulls reason to come back out of their bullpen and play a little more.
And as that vol comes down, and we hope it will keep coming down,
that should indicate more willingness of that cash and money markets to come off the sidelines and go into buying stocks.
And you'll see prices of stocks go up.
So that is sort of a basic forecasting of what's coming down the road.
Now there are all these super, super complicated models to forecast,
and they really don't do any better overall than just looking at some simple stuff and seeing what it's telling us.
Coming over here, Tokyo last night, it started out up and had a little dip, and then it had a couple bull runs.
So it was up a respectable half a percent today.
Everyone was happy in Asia, and then the sun set over in Japan, and it rose across Europe and into London it came.
And they started out in a chipper mood, but then there was a little dip like there had been in the Tokyo exchange.
And then the bulls had a good fun, and then they sagged off, and it started coming down.
By the end of trading, they were in negative territory.
Now look over here. The sun went down in London, and it started rising on the East Coast,
and you notice that that sourness that was just starting to set in in London picked up steam when we got to the East Coast of the United States.
That right there, see that drop at the beginning of our trading?
That was a continuation of the sour mood that had started to take hold clear over in London earlier.
So you can kind of see that drop, that tail there in the red,
that was the same tail that became the head going down here on the East Coast.
And we went down for a while more, and finally the bulls said enough of this, let's start pulling back up.
Still technically a bear day, but it's coming back from the dead.
And so is my side bet.
There you go. Now, a couple of stocks just to have my favorite whipping boy, Tesla.
Oh ouch, down more. As I have predicted, it's going to ease back.
It's not going to go. This is actually a pretty hard drop.
The Dow is down just a little bit. Tesla is down a lot more. Why?
Well, look at the beta. Beta says that there's a 2.43 risk,
which means that whatever happened in the market overall is magnified quite a bit with this stock.
And the earnings per share is indicating that it's overvalued, so it's still got room to move down.
Not hard to forecast this kind of a process going on.
Now let's go look at some happier things. Alphabet, Google, G-O-O-G.
Nice little up today. See that volatility?
It started out way up, and then bull run, bears, and then it floated, bull run, bears, bull run,
and then the bears kind of grabbing it there at the end.
So there's a little bit of volatility, but overall Google Alphabet is showing good strength.
And notice that it's beta. It's just a little riskier than the market, undervalued,
so we can expect some good news. There'll be bad days, and there'll be good days,
and Google probably is a company that will have more good days than bad days.
Going over here, Apple. Little riskier if I recall.
Apple is up, nice, almost 1.5%, but of course it has a relatively higher beta, 1.31.
Relatively valued, not undervalued or overvalued, but it's just going up because the market went up.
It magnifies the market's trends, and it's also got its own peculiar trends as well.
Apple is a company that's very popular, and they're doing their best to compete with the new phones
pouring out from Google Pixel 8 and from Samsung and On1, or One, or something like that.
So these are the kinds of things that you look at, and you can make judgments without listening to a lot of talking heads.
You can think for yourself about what's going on out there in these markets.
I'm going to do one last one, which will be my example for today's lecture.
This is United States Steel. Down a little bit, very risky, 2.04 beta, way above 1.
But interestingly enough, it's an undervalued stock as far as PE, if you look at PE ratio.
So this is one of those where, yeah, there's a good chance of it going up dramatically.
It's very risky, and the intrinsic value looks to be undervalued right now.
And it does pay a little bit of a dividend, 20-cent check per share, which is 0.44%, 45.61.
So it's one of those investments that's worth looking at.
But this is the one that we will dive into in the most detailed way.
So the first thing that I'm going to do, and I said this last week,
this was one of the subjects, if you were here as a freshman in Business 100, where you get financial information.
And in fact, that's part of the Library Research Project.
But it's not emphasized too much.
Here it will be, and you'll see that it's more than just financial information.
You can learn a lot about a company by going to this resource, sec.gov.
I'll put a link to this, but this is a resource not just for this class, but for classes after this.
Now, a little background on what's going on here.
The Securities and Exchange Commission is an agency of the executive branch of the United States government.
Laws are passed by Congress, signed by the President,
and then these agencies interpret those laws and make them into regulations that oversee different industries.
That's what agencies do.
So the SEC regulates the securities industry,
and it does so with greater or lesser degree of aggressiveness, depending upon the era and all that.
Now, every public company must make filings with the SEC.
Some of those are periodic.
They are extraordinarily burdensome, but that's the price you pay,
so that investors and prospective investors can see everything.
Now, the history of the SEC, well, the history of regulation.
Back in my time, it was kind of a Wild West.
These filings, they could have material misstatements of fact, in other words, lies.
And so the reliability of the statements was pivoting on the reliability of the officers and directors
and the accounting and the auditors and the lawyers.
If they were honest, they were going to tell the truth.
If they were dishonest, there was not a whole lot of risk that there would be sanctions against them.
In the 1990s, this was a terrible problem,
not just for public companies reporting, but in all manner of business activities.
What were clear and unquestionable violations of major laws were done with impunity by companies like Microsoft.
They just did it, and they calculated that there would not be consequences
until the effects had created for them companies that were virtually untouchable.
That's just how it worked.
It came to something of an end.
There were a couple of major financial scandals.
One was Enron, another was WorldCom, where their financial statements were just bald-faced lies.
They were just lies, the whole thing.
A lot of investors lost extraordinary amounts of money in the billions of dollars.
But even worse, the workers of these companies, 10, 20, 30, 40, 50 years, they'd worked for Enron,
and they lost everything.
Their pensions were gone because of the shenanigans of the insiders and the executives.
So hell broke loose.
In the early 2000s, Congress passed a law.
It has the informal name Sarbanes-Oxley, Sox.
They talk about it in the book somewhat, too.
But Sox cracked down on the lies.
One of the things that it did, it made it so that the officers and directors and accountants and all this
had to personally sign all of these forms that were filed with the SEC.
So not only if the company made material misstatements of fact, not only could the company be fined,
but those officers and directors and accountants and lawyers could be fined as well.
And if the violations were egregious enough, the SEC could refer the matter to the Department of Justice
for criminal prosecution of those signatories.
So if they lied, they could go not just pay massive fines, they could go to prison.
That was major.
The financial statements are highly reliable now.
But that doesn't mean that bad things can't happen.
I won't mention the name, but on Musk, his financial statements, the filings, had material misstatements of fact.
The SEC fined him a lot of money.
And what did he do?
He went on Twitter and cussed out the SEC.
Now if I did that, I would be Mrs. Bubba at a federal facility, but he does it, he gets by with it.
So there is still that caveat emptor, buyer beware.
You have to assess, okay, are these officers and directors trustworthy, reliable, mature adults,
or are they crazy mofos who will do whatever the hell they want?
Fortunately, corporate America is for the most part made up of the former, not the latter.
So we can rely on these filings that are made by these companies.
Now about the filings.
Here on the main page of the SEC, you go over to on the top horizontal bar, filings,
the drop down menu takes you to company filing search.
Now if I don't have it up, I'm going to have to check it.
I'll give you the link to this in Canvas.
Now here you will have a place where you can type in a company name, a trading symbol, or something called a CIK.
A CIK is like the social security number of a security.
Each security will have its own CIK.
The common stock of Apple will have a CIK.
The 30-year bond of IBM will have a CIK.
They all have it, but I mean I can't even memorize any of those.
So I go with the trading symbol.
Now let me warn you.
You can just type in a company's name, but that can be perilous.
For example, let me do this.
It's not behaving.
Our internet is...
Come on.
Really?
Let's refresh.
That drives me crazy.
Sears.
There we go.
Now watch what happens if I type in Sears.
It will give you a whole lot of companies that might be the Sears you're looking for.
It's better to type in the trading symbol.
So in this case, I'm going to type in an X.
That's U.S. Steel Corporation.
Boy, the internet is suck right now.
Search.
I won't wait.
Okay.
What the heck is going on here?
It's not what I...
Oh, I see.
It's giving me a lot of different companies that have an X in it.
Okay.
This should simply give me a drop-down of choice.
There it is.
United States Steel.
Now, let me take this out here for a minute.
Company, public companies have to file a lot of different forms.
I mean, I can't even tell you what some of them are by the numbers of them.
But the core forms we are interested in are the 10 Qs, the 10 Ks, and the 8 Ks.
Now, the Q, a Q is a quarterly filing of the financial condition of the company.
Those build up to the annual end of fiscal year, K.
We call them the Qs and Ks.
These are periodic.
They will always be there.
You can tell when a Q or a K is coming up because you'll have the numbers people
moving around more quickly in the company and getting excited about this, that,
and the other thing and asking you for...
maybe asking your department for numbers and all that.
The 8 K is different.
The 8 K is a filing for a notification of a non-recurring event.
Of a non-recurring event.
So, for example, you, madam, you're the chief financial officer, you get abducted by aliens.
That is an 8 K.
Non-recurring, I think so.
Hasn't happened to you.
Happened to our chief operating officer a few years ago,
but that was because he was in a cow field tipping cows,
and this alien mothership came over and picked him up accidentally.
Once they realized he wasn't a cow, they brought him back and threw him down.
There's another 8 K filing because he came back.
Real examples for real people.
Okay, so the 8 K, when something happens, you are promoted, madam, to the CEO of the company.
That would be an 8 K filing.
You, on the other hand, madam, you were the chief operating officer once we fired him
because he wouldn't stop going out to the cow fields,
but now we fired you because you're doing the same thing he did.
What is this?
Anyway, you understand.
Okay, so these 8 Ks, back in the day, when I was a consultant, I file, I create these forms, paper,
and it was quite, the Ks and Qs were a nightmare.
But I looked like I had magic because back in that time, companies had them,
but they just didn't do that much with them.
I had a computer and I had a printer, and I figured I knew how to do templates,
so I was able to do these faster than people normally could.
But here's the kicker, 8 Ks, I helped these little companies,
and they were forever putting out these idiotic press releases.
Press release, our company is on the verge of disruptive technology.
We expect to have revenues within two months, and then two weeks later,
our company is on the verge of disruptive technology.
We expect to have revenues in five days.
All they were doing was pump and dump.
They were pumping up the stock so that when the Rule 144 window opened, the insiders could dump stock.
That was all it was.
But each one of those needed an 8 K filed for a non-recurring event.
Press release, that's non-recurring.
It doesn't happen in a normal cycle.
So every time they did that, then they'd tell me they did it,
or I'd find out through the news tickers at the time, and I'd say,
do you know you have to file an 8 K? Why? It was just a press release.
It was a non-recurring material event that you broadcast.
And so every time it looked like I was doing this hard work,
but I'd just type a few lines in and file the 8 K, and I got my $40.
So here, let me show you.
Okay, here's your 8 Ks.
Look, there are a lot of these.
You see, each one of these is some non-recurring event that is material,
so the public has a need to know it.
So if you look inside one of these, they're really simple,
and a lot of them are just, what the hell are they talking about there?
Like this one.
See the 8 K?
This is all boilerplate except for this little blurb here telling what happened.
And I don't even know what the heck that, you know, on February 2nd, 2024,
in lieu of holding a conference call, the corporation made available a video
to discuss its results for the fourth quarter.
I mean, that's an 8 K.
They did a video instead of doing a conference call.
So it was non-recurring, it was unusual,
and therefore they pumped out an 8 K about it.
Now, the truth be told, as fast as news services are these days,
I mean, the 8 K might not even be posted until after this is,
some news station or news service has made it known that it happened.
The truth be told, this just showed up in the last hour,
and this was on, this was, I saw this on one of the business news services this morning.
So, yeah, it's not as good as maybe keeping your eyes on every news story,
but it's worth it to have these around.
Sometimes you can read these and you can ask yourself,
okay, what are they saying that they're not saying?
Well, the CEO of the company resigned.
That's all it would say in the 8 K, but then that leaves you to think,
hmm, I wonder why the CEO has resigned,
and who are they going to put in place of him,
and what will that have to do with the company's future prospects?
You can look into these 8 Ks and ask,
they can sometimes make more questions than they answer,
but it's good to have those questions.
This is an 8 K, and I didn't mean to have it go on quite that tediously.
Okay, let me kill this.
Okay, so let me get rid of the 8 Ks.
Here we go, the 10 K.
See the Qs?
These were the Qs that built up to the K.
There's the first quarter, 10 Q, the second quarter, 10 Q, third quarter, 10 Q,
and just yesterday, no, a couple of days ago,
out came the statement for the whole year, the K, annual, the annual statement.
It has all the quarterly information,
and it's all put together into a full year of documents.
Now, I wouldn't beat you up on the technicalities of these,
but I could ask, okay, which of the following would be the form filed for a non-recurring event?
The 10 Q, the 10 K, the 13 D, things like that,
just to see if you remember what's what in this.
Now, we're going to go to the 10 K.
Don't click on the text hyperlink.
Click on the little filing box right there.
Now, in a minute, the one that will be the most important,
see this little blue oblong button here?
It says interactive data.
That's our go-to.
But before that, let me show you what 10 Ks look like.
What we used to file in triplicate on paper with the SEC.
Now it's a document that's electronically built on a template with tags for everything that you put in.
Now you say, well, what are all these?
These are hyperlinks from the core document.
Click here to see this exhibit.
That's all those are.
The document itself is that first one, the 10 K.
This is what an actual 10 K looks like.
Now, back in the day, we weren't allowed to have colors and pictures, but times have changed.
So let's go and see what a 10 K looks like.
And on and on and on and on and on until Jesus comes back.
There.
We're at the end of it.
That is what we used to put together.
136 pages.
Now, first let's go back up here a little ways.
Oh, look at this.
The electronic signatures of the officers and directors.
That's what I was talking about, Sarbanes-Oxley socks.
They're putting their blood on the line.
They are attesting legally to the validity, the truthfulness, and the material accuracy of this 10 K.
They themselves are.
So if there are misstatements in there, they can personally get fined.
And if they are bad enough, they can be taken to criminal trial.
So that's what I was talking about, that Sarbanes-Oxley.
There are the electronic signatures right here.
Now let me take you back up to the top.
You would really have to have no life, and I mean zero, to read a whole 10 K.
Some people do it.
I mean, I've tried.
God knows I wrote them and any more.
I don't know.
But let me show you something.
There is one section that is useful.
This is a part of the 10 K that you can use in term papers, research papers.
You can also use this if you want a really good idea of what a company is all about
before you go into an interview for a job with that company.
It's item seven, the management discussion and analysis of financial condition
and results of operations.
Our word named for it is MD&A, M-D ampersand A, MD&A.
And this is where the company turns in on itself and just talks about everything,
about why the numbers are what they are, what they're doing to do better,
or what they're doing right, what kinds of exposures they're facing,
like a SWOT kind of analysis, threats, opportunities, strengths, weaknesses,
lawsuits that may make trouble for them down the road.
They go through in depth and they even take apart the financial statements
and they make little mini tables through this.
You can copy those and paste them into your own research papers.
Copy these tables.
Now obviously give the source, there's no crime in the source,
and what's more important is these are primary.
Every financial service that reports anything like this or the numbers themselves,
they got them from here.
So instead of going to one of those secondary resources,
which might glitch in data or something like that, you got it right here.
Tables, they've even usually got some pie charts and stuff like that.
Oh, here we go.
Capital spending by segment, 2022 to 2023.
Copy and paste those.
Source, form 10K filing by United States Steel Corporation from the SEC, Edgar,
something like that.
Not hard to cite it.
But oh, look at the more pretty tables, more little pieces where they explain what happened.
You don't even need, they're not, and they're not going to sugar coat it.
That's the one thing that has always been a feature of the item seven is that it's honest.
And it's almost, sometimes you almost think that the people writing this are having their gotcha
of the company saying what has to be said.
And they can't be fired for telling the truth because they'd be fired for following the law.
So it is a very honest document, and it's not going to pull punches.
It's going to say here's what happened.
It's bad or it's good.
Here's how we'll make it better or here's how we will improve on what's already good.
So that's the only thing about the form 10 that's a really good thing for you to know about.
Now, let me go back to that page on the filing box.
See this blue button just above center on the left-hand side, interactive data.
Now, when I click on that, I can see over here on the left side, this box, financial statements.
They have them right here.
Really nice.
And you'll see me every now and then just reach in here and grab a number.
I think I did it like the first or second day of class.
But I mean, they've got all these different financial statements right here so that you can see quickie information.
But you really shouldn't copy and paste this because every public company is required to put all of its financial statements
into an Excel spreadsheet that anyone in the world can see. And here it is.
It's right above the black box with the little yellow 10K.
It says, view Excel document.
If you click on that, you will download the financial statements of U.S. Steel,
the same ones that the management looks at, the same ones the SEC looks at,
the same ones the biggest investors on earth look at.
You've got them right here.
Now, let's have a look.
First things first.
This is authoritative.
You ever had a term paper?
What is the legal address of this corporation?
It's on the cover page.
There is no other that would be the right answer.
Remember that they have to tell exactly the truth and no misspellings.
So there you go.
Now, the next thing.
Let me show you the financial statements of U.S. Steel.
See those? Look at the worksheets.
This will take a while.
These are the financial statements.
And I am regretting this because I'm going to go clear to the end
and then have to go clear back to the beginning.
I mean, there is everything in here.
I mean, they probably got the weights of every executive's butt somewhere in here.
I mean, it is ridiculous.
Now, do you need all of those?
Oh, hell no.
Do you think I'm going to go through those with you?
You are wrong.
There are just a few that we need.
But if there were ever anything that you really wanted to know,
like for example, well, what kind of lease payments do they have?
You could just do an Excel search, lease,
and it will take you to the spreadsheets that had it.
Oh, thank God. We finally came to the end.
Now we've got to go clear back to the beginning where the ones I want are.
Take you back here.
What was I saying?
Oh, yeah, but I mean, it's got all of this information,
and you can't get a better source.
I mean, Googling it or something like that isn't going to get you the actual information itself.
And it cannot be incomplete here.
It will be the whole thing.
They'll tell you all the lease payments.
They'll even break down the executive compensation.
You find it all there.
Now the next thing I'm going to do,
this is something that is done in every business there is.
You rearrange the workspace for efficiency for you.
If you, in finance, will move the important financial statements all to a cluster together.
If you are in any kind of a manufacturing industry,
you will move the tools that you use most to the place where they are used.
All of this, we all do it in any business, and in our business it is no different.
Now I want to caution you that what I do today is lightweight baby Excel.
By the time I get to the lecture on Wednesday, we'll be in intermediate Excel.
If you know what I'm doing and you would have done it yourself,
then you can legitimately say on a resume, I know Excel.
But if it gets to the point anywhere along here where you say, what the hell are you doing,
then for God's sake get that certification and don't forget what you learn in it.
Okay now, the first thing I want to warn about, back a long time ago, 10 years ago maybe,
everyone had to use the same names for the same things.
If it's an income statement, you call it an income statement.
Now you can call it a variety of things.
In the case of US Steel, they call it the consolidated statement of operations.
That's true for other financial statements too.
Sometimes I'm even bluffed, which one of these is my stupid balance sheet or something like that.
So that's a little bit of a, you know, just look around.
Now another thing that's going to happen, and I'll show you in a minute,
financial statements used to all have the same name for the same entries.
You called it operating income.
Now you can call it earnings before interest and taxes, EBIT, and various things.
And also there used to be lines that everyone had to put in.
Now some places won't put those in.
And so you're left, okay, there's something missing here.
Then you have to go clawing around or doing calculations to get what you want.
I'll show you examples of that in a minute here.
But, okay, I've got the income statement.
Now the next thing I'm going to want is the balance sheet.
That's not it. There's the balance sheet.
So what I'm going to do is click and hold it.
Whoops, try that again.
Click and hold it and then scoot it over here so that it's sitting next to my statement of operations.
I'm moving the workspace around to fit what I want.
Now the next thing that I'm going to do is find the statement of cash flows.
There it is. Consolidated statement of cash flows.
Click and hold it.
I'm going to scoot this one over next to the balance sheet.
I've got them in the work.
I've got them where I, those are the ones I'll need.
So I don't want to just jump all over the place, scroll back and forth.
I've got them where I need them.
Now, next thing.
One sure way to honk off your boss is to start putting scratch work on one of the sheets that you downloaded.
I've got some pretty phenomenal stories about that.
If I've got a calculation that relies on numbers in the income statement and the balance sheet,
I don't want to do it on the income statement or the balance sheet.
I want to create, and I'm going to do it right between the balance sheet and the consolidated statement of cash flows
so it's where I can get to it pretty quickly.
Right click, right click right between them, insert a blank worksheet.
And call it calculations.
That way all of your calculations are done on a scratch sheet.
So they're not cluttering up the core.
Now there's actually another reason to do this.
Sometimes you'll see me actually make two blank sheets.
One for calculations and then another one for results.
You don't want to do your calculation or especially you don't want your results
parked on one of those primary sheets.
Two reasons. One is it clutters the sheet.
And two is if you're presenting in a meeting, you don't want wandering curious eyes,
not on what you want them to see.
You want them to see the results.
You don't want some ho handle in your presentation saying,
can you look over that income statement and explain to me what, no, you don't want that.
You get them over where they can't be distracted by other things.
Okay.
Now I'm going to show you a couple of things here.
Okay, statement of operations.
Now, let me do something here.
Hold down control and click on each of those sheets.
And I'm going to expand all of them at once so you can see them.
They're in the back a little better.
Okay.
Sorry about that.
I just wanted to make sure you can see them.
Okay, so now let's go over here.
Click out of that, highlight all of them.
Statement of operations.
Now, I don't expect you to be able to catch it.
If you can, I will buy you a cookie.
What is missing that would normally be, you would expect to see in an income statement?
You're all accounting geniuses now.
You've had accounting 131.
What's missing?
And it shouldn't be, but it is.
Now some have it, but apparently, and I don't know the rules for this,
but apparently it's just discretionary whether you put it in there or not.
But we in finance, oh yeah, we need this one big time.
Do you see it?
Gross income.
In other words, your revenue is minus your cost of goods sold.
Now we care about that a lot.
You'll see why here in a minute.
Gross income.
And all that, that is nothing but equals revenue minus cost of goods sold.
Enter it and then copy it over.
Now, one thing I've got to make this mention.
Professionally, you're supposed to not use the mouse.
You use the keyboard for everything, all your commands.
And you'll learn about that when you take the certification course.
But for teaching purposes, you can't see what I'm doing on the keyboard,
and so it's better to use the mouse here.
And I still use the mouse for some things anyway.
I don't care what they say.
But anyway, there we go.
So that one's in there.
We're all good.
Now there's one that is in this one that you don't usually see anymore.
It's the depreciation and amortization line.
That's missing.
And we need that one big time because that's a non-cash flow expense.
So we need to know where it is so we can fix it.
But it's not in most of them.
But this company has it, but US Steel has it in there.
Now if it's not in here, you have to run over to the statement of cash flows to find it.
It will be in there.
But anyway, okay, so now let me take you down.
And this is the preliminary clean it up before we do anything else.
Down here, earnings before interest in taxes.
That can have a number of different names.
You can hear it or see it EBIT.
Or you'll see what I oftentimes call it, operating income.
Sometimes you'll hear me shorten that.
You'll just hear me say operating.
It can have any of those names.
Different companies use a different name for it.
Like I said, there is no standard this is what you put anymore.
It used to be Manai Moore.
Now before I go any further, I want to bring up one, they bring it up in the book.
I'm going to put it in and then I'm going to take it back out.
I'm going to put it in and show you what it is because the book does.
But also because for a couple of years, corporate America has had kind of an obsession with this.
So there was the CEO of the company.
He was, we were at a dinner and he was chatting with people.
He chatted with me.
I heard him kept saying EBITDA.
I thought what the hell is he saying?
They were having beers that night.
But it turns out he was saying EBITDA.
Earnings before interest, taxes, depreciation and amortization.
So EBITDA, insert, I'm going to put it in here and then I'm going to take it back out.
It is earnings before interest and taxes and income taxes
and depreciation and amortization.
EBITDA.
And your book uses that breakdown of it.
Now all you have to do is take your EBIT, all you have to do is take your EBIT
and then add back depreciation and amortization, which were subtracted out for EBIT.
So I want to say equals, let's try that again,
equals your earnings before interest, taxes, interest and taxes plus,
and then go back up here and add this back in.
And there's your Uncle Bob and then copy it over.
As I said, it's become kind of a fetish in corporate.
Well, what's EBITDA?
Or you see the book brings it up too, but it's not really all that interesting to us.
It is an attempt to make the income statement look more like true cash flow.
Because when you subtract out depreciation and amortization,
you're subtracting something that didn't actually happen.
So EBITDA fixes that, gets it out of your subtraction, adds it back in,
so that it looks more like a true cash flow.
It's not good enough and you'll see why on Wednesday, but it's something there.
So I'm going to take that back out now after I did all that stupid typing.
Delete.
Okay.
Now we get down here a little further, earnings before income taxes.
You'll see that one, EBT.
Now you'll hear me, the jargon is pre-tax.
We just say pre-tax.
Well, what was pre-tax?
Or pre-tax was.
So in other words, it's just a shortening.
It's how much is there before the company pays its taxes.
Net earnings.
Last one before we get to something more interesting.
That's a fancy.
Now, I was given a lecture that this is not correct.
But net earnings, the common name for it is profit or net profit.
I got a lecture from an accounting teacher here that net earnings is not the same as profit.
And he went on to give me an explanation.
And I mean, I wasn't listening to him.
I don't know why he was talking.
I'm pretty sure he was talking to me because he was looking right at me, wagging his finger.
But it's profit.
So forget it.
Okay.
Now, balance sheet.
Looking over here, there's not much I can do to that.
But now I'm going to talk about something else.
I'm going to pick out this cluster right here.
Okay, madam, you are CSI.
You know that show?
Okay.
You are the lead investigator at a murder.
I am lying there on the ground.
Obviously, I've been murdered.
Okay.
Now, it's your job to figure out why.
Well, that's not hard.
He gave quiz one.
But the other really hard question is who?
Okay.
And so you go through my pockets and you're reaching around to see if there are cards.
You find that my chewing gum, old chewing gum is in there.
And that doesn't help you.
So you go looking around the room and you've got all these witnesses.
You, sir, you definitely are a suspect.
You are too.
Let's see your hands.
Okay, they have clean hands.
And he was stabbed, so either they didn't stab him or they washed their hands.
So you're working around and now we come to you.
Obviously, you're a suspicious looking person.
You know, obviously a scoundrel.
Possibly even, you know, you listen to dubstep and you kind of favor.
You don't like Taylor Swift.
And so there's something wrong with you.
Okay, that's what we're going to do with this.
Before you pull out a stupid calculator, now remember, accountants do numbers.
We have to do numbers too just to fix things.
But we also, we are the ones who ask the why.
What happened and why did it happen?
Well, we're going to look at that.
And that's why when I was in the service, you don't just charge into an unknown zone.
You do recon.
You look, get your hands off the calculators, off the Excel, off the pens and pencils,
and you just start looking at the numbers and get the lay of the battlefield.
And in this case, I'm just going to start at the top and I'm just going to look at them.
I'm not going to ask a lot of mathematical.
I'll try to do a little quick back of the head thought.
But I'm going to look here.
Now remember, financial statements, most current is on the left,
and then further back is going right.
So I'm going to look right at the top at the revenue.
And if I look right at the top at the revenue, sir, what do you see?
Say it.
Let's try, what do you see?
Do you see anything about that revenue?
It went up and then it goes back down?
No.
Matter of fact, it went down rather dramatically.
So we've got a company that has not sold as much.
It's lost over two years $2 billion on $20 billion.
Well, that's a 10% drop in revenue.
I mean, I'm not doing any technical, well, it's technically 10.4.
No, they've got a revenue loss and it's noticeable,
down over two years by that much.
Now then the next thing I'm going to look at is the cost of goods sold.
Oh, well there's a problem right there.
Because, yeah, the cost of goods sold slid a little bit,
but it was not as proportional as the loss of sales.
So dollar for dollar it looks like they're paying more for wholesale even on less retail sales.
And that is confirmed right here.
Look at the gross.
That's why that gross income was important for us to look at.
Do you see how they really have lost ground?
In other words, how much of every dollar they keep after they pay wholesale costs has gone down?
Look at that.
From 5.7 billion, their gross income fell over two years to less than half of that.
So right there, big flag.
I don't have to really calculate.
I just have to look.
Revenues went down somewhat.
Cost of goods sold went down, but not as much.
And the net effect was an erosion of their cost of goods sold.
A really heavy erosion.
Okay, now we go along here.
Yeah, there's selling general administrative.
Did pop.
It's noticeable.
That might be an issue we would want to have a conversation about in management meetings.
We may need to do some cost cutting here.
Our sales are down.
Why did our wages, utilities, meals and entertainment, mailings, advertising, why did that go up if we have lost sales?
Then we go down a little further and we see depreciation and amortization went up.
Now that's interesting.
That would tell me that they've made a pretty heavy new capital investment.
They've bought more property, plant and equipment so they've got more depreciation expense.
Which is a good thing because that's tax shield and all that.
But still, they have not earned as much cash, but apparently they spent on something big.
A new factory, completely new technology for the steel, whatever.
Okay, now the rest of this is all over the place and it's hard to even tell what it is.
But if you look down here at the end, the total expenses over two years rose.
They fell a little bit over the past year, but it's still not terrible.
Okay, EBIT, look at this.
Our operating income is, oh my God, that's a real whopping down.
So the cash flow from operations has lost a lot, a noticeable amount.
It's gone down more than 80 percent.
From $5,000 down to $1,000, that would be $4,000.
Yeah, their earnings, EBIT, has really taken a bath.
And get down here to the net earnings, look at that.
Lost a lot of ground.
Okay, now we can walk back along the murder path.
First things first, their earnings before taxes, right here.
Oh, I was on the wrong line.
Their earnings on taxes suffered massively over two years.
You see it went from $4.3 billion down to $1.04 billion, $1.05 billion.
Okay, where did that come from?
You can trace that right back up here to gross income, falling.
And you can trace that right back up there.
They're losing money because they're not selling as much.
And yet their wholesale costs are not going down as much as their sales are going down.
We've traced it back to the source of this disaster on their net income.
It happened right at the top.
It wasn't selling general and administrative expenses.
It wasn't more depreciation expense.
It wasn't any of those things.
It was that they just didn't sell as much,
and their wholesale costs did not drop as much as their sales did.
Proportion, did not drop proportionally.
So we've got a problem.
The company clearly for the last year has showed signs of definite trouble.
Now we go over here to the balance sheets.
Cash lost some position.
But now look at the inventories.
Our inventories fell.
That would free up cash.
Good.
Accounts receivable went down a little bit.
That would free up some cash.
Total current assets.
Now if we go down here, property, plant, and equipment, that's what I thought.
See that?
They must have bought something really big, put up a new factory or something.
See how their property, plant, and equipment has jumped?
Okay, so our total assets, they have actually risen a little bit.
They've managed their cash flow somewhat.
Accounts payable, payroll.
They're catching up on payroll, which uses cash.
Crude interest.
Nothing really stands out.
Current liabilities stayed pretty stable.
Okay.
Going down here.
I mean, if you look around, their total asset base has improved somewhat.
So the conclusion we would make from this is that the income statement is telling us that they have a short-term problem,
and it is sales.
But the balance sheet, holding pretty steady, tells us that this is not a reason to panic.
You are not going to buy U.S. steel probably, but you're not going to run away from it.
This is what we would call a recommendation for a hold.
You wouldn't buy it because that income statement isn't good.
You wouldn't sell it because the balance sheet is stable.
So your best recommendation, just keep what you've got in your portfolio.
Don't up the amount of it and don't drop the amount of it.
Just hold.
This is what we do.
And I haven't even touched all those numbers and cranked them.
This is what we do is the numbers are important, sure, but we have minds and we can look at these numbers.
Now, can you do this right now?
I sure as heck wouldn't expect you to.
By the end of the semester, you'll be pretty good at it, and then you can take my jobs away from me.
But for now, that's all I have for you today.
I thank you.