1
00:00:00,000 --> 00:00:08,000
Alan Cring Productions in Association with Emergent Light Studio presents

2
00:00:10,000 --> 00:00:16,000
the Illinois State Collegiate Compendium Academic Lectures in Business and Economics.

3
00:00:17,000 --> 00:00:23,000
This is Business Finance, FIL 190 for spring semester 2024.

4
00:00:23,000 --> 00:00:28,000
What are you going to do today?

5
00:00:29,000 --> 00:00:31,000
Today, ratio analysis.

6
00:00:32,000 --> 00:00:43,000
And just as a first pointer, I've uploaded some files for you.

7
00:00:44,000 --> 00:00:47,000
And what I'm going to do today will be mostly Excel.

8
00:00:47,000 --> 00:00:55,000
I'll try to go slowly. If I go too fast, you can shoot me with a tranquilizer dart or something like that.

9
00:00:55,000 --> 00:01:02,000
But I will also upload the product of what I've done to Canvas for you, as well as another,

10
00:01:02,000 --> 00:01:08,000
there's another document there for you to consider, a couple more for you to keep in mind.

11
00:01:09,000 --> 00:01:15,000
But I'll probably spill, this lecture will spill a little bit into Monday, not a whole lot of it,

12
00:01:15,000 --> 00:01:20,000
but some of it will. So I'll make sure that you have some extra time for the homework

13
00:01:20,000 --> 00:01:23,000
that will be coming up due for this one.

14
00:01:23,000 --> 00:01:30,000
But other than that, we are going to have a look, as we always do, at the numbers

15
00:01:30,000 --> 00:01:35,000
before we dive into Excel and do a tedious lecture today on that.

16
00:01:35,000 --> 00:01:42,000
But as you can see, the markets have, oh, we're still open, got a little less than an hour.

17
00:01:42,000 --> 00:01:46,000
So we can go through this. And first things first.

18
00:01:48,000 --> 00:01:54,000
Who haven't I bothered? Sir, is this a bull day or a bear day on the market?

19
00:01:56,000 --> 00:02:01,000
Bull. It's a bull day. Not a big bull day, but it's a bull day.

20
00:02:01,000 --> 00:02:04,000
I mean, we take our happiness where we can get it.

21
00:02:04,000 --> 00:02:11,000
As you can see, the Dow is up about a half a percent, and the somewhat riskier S&P 500 is up more.

22
00:02:11,000 --> 00:02:19,000
Normal pattern,.88 percent. And the riskiest of those that you see up there, the NASDAQ, is up 1.07 percent.

23
00:02:19,000 --> 00:02:26,000
It's following a typical pattern of risk return for today, which it almost always does,

24
00:02:26,000 --> 00:02:33,000
but sometimes it doesn't, and then we ask, well, what's going on that it's not doing what we usually see it do?

25
00:02:33,000 --> 00:02:39,000
Which is good news. So investors were putting money into stocks.

26
00:02:39,000 --> 00:02:47,000
They were pulling it off the sidelines, buying stocks, hence why the prices are going up.

27
00:02:47,000 --> 00:02:50,000
But let's see what was going on with the bonds.

28
00:02:52,000 --> 00:02:57,000
Ten-year bond. The yield is up, so the price would be down.

29
00:02:57,000 --> 00:03:04,000
So as you can see, the yield was up about, what, 2.3 basis points, not much.

30
00:03:04,000 --> 00:03:12,000
But that would mean the prices were down. So investors were drawing a little bit on net out of the bond market

31
00:03:12,000 --> 00:03:17,000
and probably using those proceeds to buy into the stock market.

32
00:03:17,000 --> 00:03:25,000
This is a good sign. Investor confidence, they're willing to take the higher risk of equities

33
00:03:25,000 --> 00:03:33,000
because they see more potential gain and shed some of their more defensive position, which was in the bonds.

34
00:03:33,000 --> 00:03:40,000
And so we have sort of a nice little, nothing spectacular, but it was nice good news today.

35
00:03:40,000 --> 00:03:46,000
Looking at more physical things, crude oil is in that trading range.

36
00:03:46,000 --> 00:03:52,000
I've mentioned it on a number of occasions, from about 72 to 79.

37
00:03:52,000 --> 00:03:58,000
And it seems to like that range, and right now it's on the lower end of it, bouncing around.

38
00:03:58,000 --> 00:04:08,000
And so that's giving us some indication that the traders are not concerned about supply disruptions of oil,

39
00:04:08,000 --> 00:04:15,000
resulting from the conflicts around the Middle East and Southwest Asia.

40
00:04:15,000 --> 00:04:21,000
So good news, gas prices, they're not going to go skyrocketing.

41
00:04:21,000 --> 00:04:28,000
They may even shed a little bit of where they are, go down a little bit, but it won't be much.

42
00:04:28,000 --> 00:04:34,000
Oil is just staying in a nice place. Now gold, pretty much flat.

43
00:04:34,000 --> 00:04:39,000
There's no rush to buy gold because the world is coming to an end.

44
00:04:39,000 --> 00:04:47,000
So we see some good numbers today. Equities are up, investor confidence is up, bonds are down,

45
00:04:47,000 --> 00:04:54,000
so they're willing to take more risk, investors are, and no one is buying gold waiting for the apocalypse to happen.

46
00:04:54,000 --> 00:05:02,000
All good news for the day. And of course, I can always change on a dime if something scary happens,

47
00:05:02,000 --> 00:05:07,000
but it looks like there's generally positive sentiment in the markets.

48
00:05:07,000 --> 00:05:16,000
Now over in Japan, the Nikkei 225 finished about flat. It was down all day, just a little grouchy.

49
00:05:16,000 --> 00:05:24,000
But it was down 0.11%, which is pretty much not even anything to notice.

50
00:05:24,000 --> 00:05:32,000
It's just a little grumpy Tokyo was, and they went finally closed, went to bed,

51
00:05:32,000 --> 00:05:39,000
and then the sun rose over in Western Europe and in Great Britain.

52
00:05:39,000 --> 00:05:50,000
And we see that that grumpiness had more steam in London. It went down, it slid downward, not hard, but it slid.

53
00:05:50,000 --> 00:05:56,000
Then it stayed stable, and then there was another selling wave that brought it down even more.

54
00:05:56,000 --> 00:06:06,000
It wasn't a horrible down day, but it was definitely a down day for the London Exchange and the FTSE,

55
00:06:06,000 --> 00:06:13,000
which is the index of 100 big companies on it. But interestingly enough, that didn't come over here.

56
00:06:13,000 --> 00:06:21,000
When the sun set over in London and rose over here, our investors were in a pretty good mood.

57
00:06:21,000 --> 00:06:26,000
It was up through the day, had a good spike there, most of the markets did,

58
00:06:26,000 --> 00:06:29,000
and then it just sort of drifted along waiting for some more good news.

59
00:06:29,000 --> 00:06:37,000
But the optimism seemed to have let it lift up a little bit more towards the end of the day.

60
00:06:37,000 --> 00:06:50,000
Looking at a couple here, just out of curiosity. Of course, my favorite whipping boy, Tesla, it had a good day, I think.

61
00:06:50,000 --> 00:06:54,000
Yeah, it was up pretty nicely for the day.

62
00:06:54,000 --> 00:07:00,000
Now, looking at a couple of other markets, what I want to look at here.

63
00:07:00,000 --> 00:07:08,000
Oh, MRO, RMO, no, no, no, no, no, MRO, Marathon Oil.

64
00:07:08,000 --> 00:07:13,000
Just look at the oil market, up a little bit, good day for oil.

65
00:07:13,000 --> 00:07:19,000
And you say, well, doesn't the price of oil have to jump for those stocks? Not necessarily.

66
00:07:19,000 --> 00:07:25,000
It has a lot to do with demand for what Marathon sells. It sells gasoline if demand is going up,

67
00:07:25,000 --> 00:07:29,000
as we get into warmer weather in this part of the country,

68
00:07:29,000 --> 00:07:34,000
and transportation is getting stabilized, delivery of goods and all that.

69
00:07:34,000 --> 00:07:41,000
Yeah, it's going to show some signs. Looking at a couple more, Procter & Gamble.

70
00:07:41,000 --> 00:07:51,000
Basics, look at that beta, Procter & Gamble, you probably know it, sells just basic consumer products, a lot of its businesses,

71
00:07:51,000 --> 00:07:55,000
and they were up a little bit for the day, nothing big there.

72
00:07:55,000 --> 00:08:05,000
Notice the beta, companies that sell basic products generally tend to be low-risk companies, and it's a profitable company as well.

73
00:08:05,000 --> 00:08:12,000
Now getting over here to our meat of the day, US Steel.

74
00:08:12,000 --> 00:08:18,000
This is the one that we're going to break down with a hardcore financial analysis,

75
00:08:18,000 --> 00:08:23,000
one of those tedious lectures where almost everything is done in Excel.

76
00:08:23,000 --> 00:08:31,000
But before we get to that fun, we do see that, just as a reminder, it's a high-risk stock.

77
00:08:31,000 --> 00:08:36,000
It seems to be undervalued though, and it is a profitable stock.

78
00:08:36,000 --> 00:08:41,000
Now you keep that in mind, US Steel is a profitable company.

79
00:08:41,000 --> 00:08:50,000
It has positive net earnings per share, which means it has positive net earnings, and it pays a nice little dividend.

80
00:08:50,000 --> 00:08:52,000
Not a huge one, but it pays a nice dividend.

81
00:08:52,000 --> 00:08:58,000
So we've got everything set up for us to be able to do our financial analysis.

82
00:08:58,000 --> 00:09:02,000
Now let me take you over here for a little bit.

83
00:09:02,000 --> 00:09:06,000
Now again, I will upload what I do here.

84
00:09:06,000 --> 00:09:07,000
Try to keep up.

85
00:09:07,000 --> 00:09:14,000
I'm going to stop a few times along the way to let you catch up if I start going too fast and all that kind of stuff.

86
00:09:14,000 --> 00:09:18,000
But if you come over here, files.

87
00:09:18,000 --> 00:09:22,000
First things first.

88
00:09:22,000 --> 00:09:30,000
In your files, you will have financial analysis formulas.

89
00:09:30,000 --> 00:09:38,000
These are the ratios for ratio analysis, all of them, that I would care about.

90
00:09:38,000 --> 00:09:45,000
Now there are one or two in here that aren't in your book, and I may have missed one that the book brings up.

91
00:09:45,000 --> 00:09:46,000
I don't think so.

92
00:09:46,000 --> 00:09:56,000
But just to make it clear to you, you can have this sheet with you for quizzes and for exams.

93
00:09:56,000 --> 00:10:01,000
Don't write anything else on it because you get a note card for exams.

94
00:10:01,000 --> 00:10:05,000
But these ratios.

95
00:10:05,000 --> 00:10:11,000
Now truthfully, I don't care if you memorize them or not.

96
00:10:11,000 --> 00:10:13,000
You've got your sheet.

97
00:10:13,000 --> 00:10:17,000
If you use them enough in my business, you remember them.

98
00:10:17,000 --> 00:10:23,000
But I mean, even sometimes I'll go to one of these sheets like this to look.

99
00:10:23,000 --> 00:10:27,000
And there are literally dozens and dozens of ratios.

100
00:10:27,000 --> 00:10:33,000
And these are kind of like the top most important of them.

101
00:10:33,000 --> 00:10:36,000
And we will do these in Excel.

102
00:10:36,000 --> 00:10:40,000
The key here is that it is not your calculation.

103
00:10:40,000 --> 00:10:47,000
If you can put it into Excel, you'll get the right number if you put it into Excel correctly.

104
00:10:47,000 --> 00:10:53,000
The action for in finance is not on the what.

105
00:10:53,000 --> 00:10:55,000
It's on the why.

106
00:10:55,000 --> 00:10:59,000
Why did this ratio go up or go down?

107
00:10:59,000 --> 00:11:03,000
Is this a good number or is this a bad number?

108
00:11:03,000 --> 00:11:13,000
Now in that regard, there are a few ratios you don't want them to be less than a certain number or more than a certain number.

109
00:11:13,000 --> 00:11:15,000
That's a very bad sign.

110
00:11:15,000 --> 00:11:22,000
But inside of that, aside from that, these ratios, first of all you have to compare them to the industry.

111
00:11:22,000 --> 00:11:25,000
Okay, this ratio is this.

112
00:11:25,000 --> 00:11:27,000
Well, what's the industry average?

113
00:11:27,000 --> 00:11:30,000
Is it above the average, below the average, or at about the average?

114
00:11:30,000 --> 00:11:37,000
The second thing that you have to ask yourself is what are the changes that are happening in these ratios?

115
00:11:37,000 --> 00:11:39,000
That's important.

116
00:11:39,000 --> 00:11:42,000
That's where the key is.

117
00:11:42,000 --> 00:11:53,000
To see, okay, this is a little bit worrisome, this ratio, but it has been trending in the right direction over the past couple of years.

118
00:11:53,000 --> 00:11:59,000
Okay, so that means that the management knows there's an issue and you can see the issue being addressed.

119
00:11:59,000 --> 00:12:01,000
Those kinds of things are kind of important.

120
00:12:01,000 --> 00:12:09,000
You also want to ask yourself some deeper questions, which I would only touch on the surface, the deeper questions.

121
00:12:09,000 --> 00:12:11,000
Let me give you an example.

122
00:12:11,000 --> 00:12:14,000
See this inventory turnover ratio?

123
00:12:14,000 --> 00:12:26,000
What it measures is how many times a year the company has wiped out all of its inventory and brought new inventory in to replace it.

124
00:12:26,000 --> 00:12:31,000
Inventory turnover ratio, at least in a theoretical kind of way.

125
00:12:31,000 --> 00:12:40,000
So the whole emphasis over the past 20 years or more is get that inventory turnover ratio higher and higher.

126
00:12:40,000 --> 00:12:43,000
Get the inventory in, get it out.

127
00:12:43,000 --> 00:12:45,000
Bring more in, get it out.

128
00:12:45,000 --> 00:12:48,000
That means smaller warehouses and all that good stuff.

129
00:12:48,000 --> 00:12:51,000
You don't have to hold as much inventory.

130
00:12:51,000 --> 00:12:55,000
You sell it and you've got more in to sell the next day.

131
00:12:55,000 --> 00:13:01,000
Getting it up there to 10 times a year, 20 times a year.

132
00:13:01,000 --> 00:13:09,000
Hell, the limit is infinite inventory turnover ratio like the Japanese do with their just-in-time system.

133
00:13:09,000 --> 00:13:13,000
No inventory, therefore the denominator is zero.

134
00:13:13,000 --> 00:13:18,000
They bring in parts for a car as the car that they're building needs it.

135
00:13:18,000 --> 00:13:20,000
They don't keep it inventory.

136
00:13:20,000 --> 00:13:26,000
Therefore the bottom denominator is zero, so sales over zero is infinity.

137
00:13:26,000 --> 00:13:27,000
That's the dream.

138
00:13:27,000 --> 00:13:34,000
Get that inventory ratio up there as far as possible until the lockdown.

139
00:13:34,000 --> 00:13:38,000
You're selling your inventory out, getting rid of it, and then you bring more in.

140
00:13:38,000 --> 00:13:41,000
Well, what happens is the supply chain breaks.

141
00:13:41,000 --> 00:13:43,000
You sold your inventory.

142
00:13:43,000 --> 00:13:46,000
Oh, we don't have any more.

143
00:13:46,000 --> 00:13:50,000
And then that was why we didn't have toilet paper on the shelves.

144
00:13:50,000 --> 00:13:57,000
That's why we didn't have some other basic products on the shelves of stores.

145
00:13:57,000 --> 00:14:05,000
It was because they were keeping so little in inventory, relying on getting more the next day,

146
00:14:05,000 --> 00:14:10,000
that they stocked out and they couldn't get more, and so the shelves were empty.

147
00:14:10,000 --> 00:14:12,000
That was what it was all about.

148
00:14:12,000 --> 00:14:17,000
Never mind the talking, talking about these deep issues and complexities.

149
00:14:17,000 --> 00:14:21,000
No, it was because there was this management fantasy,

150
00:14:21,000 --> 00:14:26,000
this goal of getting inventory turnover as high as possible,

151
00:14:26,000 --> 00:14:29,000
which meant that you kept very little in inventory.

152
00:14:29,000 --> 00:14:35,000
Your inventory numbers were low, and that was the consequence of it.

153
00:14:35,000 --> 00:14:42,000
And there are other ones, too, that the questions are not, well, what are they?

154
00:14:42,000 --> 00:14:44,000
Is this good or bad?

155
00:14:44,000 --> 00:14:49,000
But sometimes it's a question of, is it too good to be true?

156
00:14:49,000 --> 00:14:54,000
And if it's bad, what are they doing to get this problem fixed?

157
00:14:54,000 --> 00:15:01,000
So in a lot of ways, the ratio analysis would go well beyond a course at this level,

158
00:15:01,000 --> 00:15:05,000
but you do have to appreciate that you look at these numbers,

159
00:15:05,000 --> 00:15:08,000
look at the numerators and look at the denominators.

160
00:15:08,000 --> 00:15:15,000
So I could say, okay, suppose, for example, that total assets of a company fell

161
00:15:15,000 --> 00:15:19,000
and net income was rising.

162
00:15:19,000 --> 00:15:25,000
Well, if you look over here at ROA, return on assets, you've got net income over total assets.

163
00:15:25,000 --> 00:15:30,000
So if net income is going up, but you're driving the total assets down,

164
00:15:30,000 --> 00:15:35,000
ROA goes up, yay, return on assets is getting bigger and bigger.

165
00:15:35,000 --> 00:15:37,000
Isn't that wonderful?

166
00:15:37,000 --> 00:15:39,000
Not always.

167
00:15:39,000 --> 00:15:42,000
I'll give you an example of this one.

168
00:15:42,000 --> 00:15:49,000
When I was in consulting, I got into, actually, personally, professionally,

169
00:15:49,000 --> 00:15:54,000
into the oil and gas industry with a wildcat group out of Texas.

170
00:15:54,000 --> 00:15:59,000
And we would just punch holes in the earth and see if we could find anything in there,

171
00:15:59,000 --> 00:16:02,000
and then dust ourselves off and go to the next one.

172
00:16:02,000 --> 00:16:04,000
Okay, that's an interesting business.

173
00:16:04,000 --> 00:16:11,000
Down in that area, there was, everyone knew everything about oil.

174
00:16:11,000 --> 00:16:17,000
And one thing that I was learning was that there were the refineries that had been built,

175
00:16:17,000 --> 00:16:20,000
many of them in the 60s and 70s.

176
00:16:20,000 --> 00:16:25,000
There were not a lot of new refineries being built after that period.

177
00:16:25,000 --> 00:16:30,000
And the refineries that existed were depreciating, okay,

178
00:16:30,000 --> 00:16:34,000
both in accounting and economically.

179
00:16:34,000 --> 00:16:38,000
Well, what that would mean is that oil companies,

180
00:16:38,000 --> 00:16:41,000
which were making bigger and bigger profits, net income was going up,

181
00:16:41,000 --> 00:16:49,000
but the total assets were going down because there was all this depreciation on the old refineries,

182
00:16:49,000 --> 00:16:55,000
but there were no new assets being added for depreciation to replace them.

183
00:16:55,000 --> 00:16:56,000
You follow?

184
00:16:56,000 --> 00:17:03,000
So total assets were falling against rising income, so ROA was going up.

185
00:17:03,000 --> 00:17:04,000
Great thing.

186
00:17:04,000 --> 00:17:08,000
Wow, these oil companies are awesome.

187
00:17:08,000 --> 00:17:10,000
Well, there was a problem with that.

188
00:17:10,000 --> 00:17:12,000
They weren't replacing refineries.

189
00:17:12,000 --> 00:17:17,000
They weren't even upgrading and fixing the old refineries.

190
00:17:17,000 --> 00:17:22,000
So by the time we get to around the beginning of the 21st century, boom,

191
00:17:22,000 --> 00:17:28,000
oil refineries, these old ancient beasts, were exploding, killing workers,

192
00:17:28,000 --> 00:17:33,000
poisoning the communities around the refineries where the workers' families lived.

193
00:17:33,000 --> 00:17:41,000
It was a nightmare, all because they didn't replace refineries with new refineries,

194
00:17:41,000 --> 00:17:44,000
replace old equipment with new equipment.

195
00:17:44,000 --> 00:17:49,000
And so what you had were ROAs going through the roof,

196
00:17:49,000 --> 00:17:56,000
and ultimately it was a catastrophe of human proportions and not just economic proportions.

197
00:17:56,000 --> 00:18:00,000
So always be cautious when a good thing looks too good.

198
00:18:00,000 --> 00:18:02,000
You start asking questions.

199
00:18:02,000 --> 00:18:04,000
Why is this happening?

200
00:18:04,000 --> 00:18:09,000
Now, again, this is beyond the wheelhouse in this course,

201
00:18:09,000 --> 00:18:12,000
but those are the issues that you begin to think about.

202
00:18:12,000 --> 00:18:21,000
And so when people throw numbers at you, don't be impressed until you know how those numbers came to be.

203
00:18:21,000 --> 00:18:23,000
Good lesson for everyone.

204
00:18:23,000 --> 00:18:26,000
Okay, now close that.

205
00:18:26,000 --> 00:18:34,000
Now, the next thing I'm going to do, show you here, if you go under files,

206
00:18:34,000 --> 00:18:38,000
I've put up a new folder in files called links,

207
00:18:38,000 --> 00:18:42,000
and that will have links that I mentioned in class.

208
00:18:42,000 --> 00:18:46,000
So remember when we went to the Edgar system to get the U.S. Steel?

209
00:18:46,000 --> 00:18:47,000
Well, look, here it is.

210
00:18:47,000 --> 00:18:51,000
Here's a link to that right here.

211
00:18:51,000 --> 00:18:52,000
You get the link right here.

212
00:18:52,000 --> 00:18:55,000
Just click on it, and there you are, right at it.

213
00:18:55,000 --> 00:18:58,000
So it's there for you 24-7.

214
00:18:58,000 --> 00:19:04,000
Instead of you having to remember what I did in book markets, you can just pull it up.

215
00:19:04,000 --> 00:19:10,000
Okay, so there is the Edgar company filings.

216
00:19:10,000 --> 00:19:13,000
And I'm going to go back through what I did on Monday,

217
00:19:13,000 --> 00:19:19,000
and I try to do this as much as I can just to reinforce, repeat something, just to reinforce it for you,

218
00:19:19,000 --> 00:19:24,000
especially if it's something important, and especially if it's something important beyond just this class.

219
00:19:24,000 --> 00:19:32,000
And knowing where to go for these primary sources is big for the rest of your career here

220
00:19:32,000 --> 00:19:36,000
at this great university.

221
00:19:36,000 --> 00:19:38,000
Okay, so here we go.

222
00:19:38,000 --> 00:19:42,000
Now remember, you're here at the Edgar company filings.

223
00:19:42,000 --> 00:19:48,000
Click on the company and person lookup, and you type in the trade symbol.

224
00:19:48,000 --> 00:19:51,000
I said you type in the trade symbol.

225
00:19:51,000 --> 00:19:56,000
I hate, hate, hate the Internet here.

226
00:19:56,000 --> 00:19:59,000
Seriously, let's refresh this page.

227
00:19:59,000 --> 00:20:03,000
Try it again.

228
00:20:03,000 --> 00:20:04,000
There we go.

229
00:20:04,000 --> 00:20:07,000
You'll get a drop down.

230
00:20:07,000 --> 00:20:12,000
And the first one is the one we want, United States Steel Corp.

231
00:20:12,000 --> 00:20:21,000
And you'll be, the landing page will be the one on the right, it says Selected Filings.

232
00:20:21,000 --> 00:20:25,000
Now I'm saying this as I'm going along so that it's in the podcast too,

233
00:20:25,000 --> 00:20:29,000
so that if you don't get it here, you'll hear it in the podcast too.

234
00:20:29,000 --> 00:20:32,000
But now we want 10Ks.

235
00:20:32,000 --> 00:20:35,000
This is where your Qs and Ks are.

236
00:20:35,000 --> 00:20:39,000
And we'll want the most recent 10K.

237
00:20:39,000 --> 00:20:43,000
And as I said last time, don't click on the text hyperlink.

238
00:20:43,000 --> 00:20:48,000
Click on the little box that says Filing.

239
00:20:48,000 --> 00:20:54,000
Okay, the first thing you'll do is you'll go to a screen that mostly is dominated by those documents

240
00:20:54,000 --> 00:20:57,000
and image files.

241
00:20:57,000 --> 00:20:59,000
Ignore those.

242
00:20:59,000 --> 00:21:08,000
Up here just above center on the left is a blue button that says Interactive Data.

243
00:21:08,000 --> 00:21:10,000
You click on it.

244
00:21:10,000 --> 00:21:14,000
Your landing page will have something special.

245
00:21:14,000 --> 00:21:22,000
Up here just above the black bordered box, you'll see View Excel Document.

246
00:21:22,000 --> 00:21:28,000
And this is the truth, no matter what the company is, they all are laid out exactly the same way,

247
00:21:28,000 --> 00:21:31,000
the same steps, no matter which company you want to get to.

248
00:21:31,000 --> 00:21:42,000
View Excel Document, just click, and it will download.

249
00:21:42,000 --> 00:21:46,000
And there is the document right there.

250
00:21:46,000 --> 00:21:48,000
Now again, this is a repeat of what I did on Monday.

251
00:21:48,000 --> 00:21:55,000
I'm just getting a running start, create continuity for the lecture.

252
00:21:55,000 --> 00:21:57,000
Okay, first things first.

253
00:21:57,000 --> 00:22:06,000
We're going to scoot documents around to set up our workspace the way we can use it more efficiently.

254
00:22:06,000 --> 00:22:08,000
We're going to need the income statement.

255
00:22:08,000 --> 00:22:10,000
There it is, right there.

256
00:22:10,000 --> 00:22:13,000
We're also going to need the balance sheet.

257
00:22:13,000 --> 00:22:15,000
Well, that's not it.

258
00:22:15,000 --> 00:22:17,000
The next one over is the balance sheet.

259
00:22:17,000 --> 00:22:25,000
So I'm going to click and hold it and then draw it over so that it's just on the other side of the income statement.

260
00:22:25,000 --> 00:22:27,000
So those two are together.

261
00:22:27,000 --> 00:22:30,000
Now you'll see why this is important here in a minute.

262
00:22:30,000 --> 00:22:37,000
Now the other one we'll need is the statement of cash flows.

263
00:22:37,000 --> 00:22:39,000
There it is, right there.

264
00:22:39,000 --> 00:22:40,000
Nope.

265
00:22:40,000 --> 00:22:41,000
There it is.

266
00:22:41,000 --> 00:22:50,000
So I'm going to click and hold it and I'm going to drag that one over so that it is just to the right of the balance sheet.

267
00:22:50,000 --> 00:22:57,000
Now I've got my three primary documents, three primary worksheets together.

268
00:22:57,000 --> 00:23:05,000
Now the last thing that I'll do is I'm going to put in, and I usually do this between the income statement and the balance sheet,

269
00:23:05,000 --> 00:23:12,000
just a little to the right of where the income statement gives way to the balance sheet.

270
00:23:12,000 --> 00:23:21,000
I'm going to right click and I'm going to say insert a worksheet.

271
00:23:21,000 --> 00:23:32,000
And I will call that the calculations sheet.

272
00:23:32,000 --> 00:23:38,000
That will be where I do my actual calculations, my back of the envelope, my scratch work.

273
00:23:38,000 --> 00:23:40,000
That's where I'll do it.

274
00:23:40,000 --> 00:23:43,000
Now I'm going to do something here that you don't need to worry about.

275
00:23:43,000 --> 00:23:45,000
I'm going to make all of these bigger at once.

276
00:23:45,000 --> 00:23:53,000
If you want to know what I'm doing, I'm holding down the control key and clicking on the sheets that I am interested in.

277
00:23:53,000 --> 00:24:04,000
Those four, the income statements, the balance works of the calculations, the balance sheet, and the statement of cash flows.

278
00:24:04,000 --> 00:24:12,000
And then if you highlight all of them together, what you do to one will happen to all of them that are highlighted.

279
00:24:12,000 --> 00:24:20,000
That includes actually if you highlight all of them, what you type in one will happen in the same place in the other.

280
00:24:20,000 --> 00:24:30,000
So we want to not let that happen, but I am going to make these bigger so you can see it better.

281
00:24:30,000 --> 00:24:37,000
Okay, so now then to get out of it, you click on a sheet that's not part of what you did.

282
00:24:37,000 --> 00:24:42,000
Okay, there you go. See all of them are now bigger. You can see them all.

283
00:24:42,000 --> 00:24:53,000
Okay, now down to the grinder. On Monday we did our recon, just looked at them. This time we're going to do calculations.

284
00:24:53,000 --> 00:25:13,000
Now the first thing we're going to calculate is the Holy Grail, the free cash flow.

285
00:25:13,000 --> 00:25:25,000
We've got a darker marker here, the free cash flow.

286
00:25:25,000 --> 00:25:30,000
And believe me, the way we do it in Excel makes it a lot really straightforward.

287
00:25:30,000 --> 00:25:36,000
You're going to just collect the pieces of information from the different sheets, you'll put them in the calculation sheet,

288
00:25:36,000 --> 00:25:51,000
and then you'll just run the calculation. It starts with this. Revenue minus costs.

289
00:25:51,000 --> 00:25:57,000
Now I'm assuming that the depreciation expense is there in the cost somewhere. It's in there.

290
00:25:57,000 --> 00:26:03,000
If it's not, we don't worry too much about that.

291
00:26:03,000 --> 00:26:09,000
And now we're going to take one minus the tax rate.

292
00:26:09,000 --> 00:26:19,000
Now first of all, this right here should, if the financial statements are well prepared,

293
00:26:19,000 --> 00:26:32,000
this is what we call EBIT or operating income. It could have either name.

294
00:26:32,000 --> 00:26:38,000
So all we do is we just pick that off of the income statement and put it in our calculation sheet.

295
00:26:38,000 --> 00:26:44,000
We don't have to do the revenue. No, it's all there in the operating income,

296
00:26:44,000 --> 00:26:49,000
or as some companies call it, the EBIT, earnings before interest and taxes.

297
00:26:49,000 --> 00:27:03,000
Now a little note about this. When income taxes were first initiated over a century ago,

298
00:27:03,000 --> 00:27:11,000
and for a long time, the T, that would be the highest tax bracket that a company could have.

299
00:27:11,000 --> 00:27:22,000
That T would have been 90% of their earnings.

300
00:27:22,000 --> 00:27:29,000
Over the years, it fell to 70% during the Kennedy administration.

301
00:27:29,000 --> 00:27:35,000
Now by today's standards, that would have been just unconscionable, the horror of all times.

302
00:27:35,000 --> 00:27:41,000
But the reality is that our country was, the economy was growing robustly.

303
00:27:41,000 --> 00:27:49,000
We came from basically just one of the nations of the earth to the dominant power of the earth

304
00:27:49,000 --> 00:27:53,000
during that time when we had a tax rate 70%.

305
00:27:53,000 --> 00:28:00,000
So don't ever let anyone tell you that this high taxes are what destroys an economy, bullshit.

306
00:28:00,000 --> 00:28:05,000
We did pretty darn well under 70%. Then in the early 1980s,

307
00:28:05,000 --> 00:28:15,000
the Reagan administration had got Congress to lower the top marginal tax bracket to 39%.

308
00:28:15,000 --> 00:28:23,000
Okay, whatever. However, it was kind of odd about that tax rate.

309
00:28:23,000 --> 00:28:32,000
39% was not what the very largest corporations paid. They paid 35%.

310
00:28:32,000 --> 00:28:41,000
It was the large but somewhat smaller corporations that were hit with that 39%.

311
00:28:41,000 --> 00:28:57,000
Okay, well then we got to 2017 and the Congress lowered the tax rate to a flat, not a tiered progressive,

312
00:28:57,000 --> 00:29:08,000
just to a flat 21%. In other words, almost they cut the tax bracket, the top tax rate,

313
00:29:08,000 --> 00:29:21,000
all tax rates down to half, almost half of what they had been from 1981 I think it was to 2016.

314
00:29:21,000 --> 00:29:34,000
That 39% was gone and it's 21% now. And this is why we are running the most insane budget deficits in history.

315
00:29:34,000 --> 00:29:40,000
And our national debt is accumulating at the fastest rate in history.

316
00:29:40,000 --> 00:29:46,000
Fortunately, that's not my problem, it's your problem. You'll have to figure out how to pay that mess.

317
00:29:46,000 --> 00:29:52,000
I'll be in my grave and you won't know where it is so you don't come there and piss on it or something,

318
00:29:52,000 --> 00:29:56,000
but it's your problem, not mine. Just a little side note there.

319
00:29:56,000 --> 00:30:03,000
But for our purposes, that T will be 21% for any kind of calculations.

320
00:30:03,000 --> 00:30:12,000
Now one more thing, interestingly enough, here's where we begin our journey away from the accountants.

321
00:30:12,000 --> 00:30:23,000
Now if you look here, we are, you get to EBIT, we don't, the accountants don't calculate tax there,

322
00:30:23,000 --> 00:30:34,000
they subtract out interest expense. We don't. Why? Because we are in the business of operations.

323
00:30:34,000 --> 00:30:41,000
What makes the company sell products and get revenues from them?

324
00:30:41,000 --> 00:30:50,000
Interest expense and dividends and all those things, that's after we see if we've got enough money to do it.

325
00:30:50,000 --> 00:30:59,000
In other words, we would worry about those after we see what operations have done for the company.

326
00:30:59,000 --> 00:31:08,000
So that's the first thing is that we stop here and calculate our taxes and we jump over interest expense

327
00:31:08,000 --> 00:31:13,000
because interest expense doesn't cause operations.

328
00:31:13,000 --> 00:31:21,000
Do you have any bills to pay like credit cards, madam? No? Oh, fine.

329
00:31:21,000 --> 00:31:29,000
Someday you will. I want to see you in debt up to your ears. This pisses me off.

330
00:31:29,000 --> 00:31:33,000
No, I've never heard of debt. Good God. Okay.

331
00:31:33,000 --> 00:31:40,000
Realistically though, a company, it's got to pay interest expense every time it's due or it's out of business.

332
00:31:40,000 --> 00:31:45,000
So why are we ignoring it here? Well, think about it this way.

333
00:31:45,000 --> 00:31:50,000
All right, guys, on the assembly line, we paid our interest expense. Everyone crank up now.

334
00:31:50,000 --> 00:31:54,000
No, they don't. What the hell are you talking about?

335
00:31:54,000 --> 00:32:01,000
It has nothing to do with the operating of the company, making the products, getting them on the shelves, selling the product.

336
00:32:01,000 --> 00:32:14,000
It is a non-operating expense. So that is out of our wheelhouse until we get to the point where we know if we can afford to pay that or not.

337
00:32:14,000 --> 00:32:25,000
So that's why we get there. Now, we have a name for this.

338
00:32:25,000 --> 00:32:39,000
NoPACT. Net Operating Profit After Taxes. NoPACT.

339
00:32:39,000 --> 00:32:51,000
Now, from here, we begin to do repairs. The first thing we're going to have to do is we're going to have to add back depreciation expense.

340
00:32:51,000 --> 00:32:57,000
It is in here somewhere. If it's not, then you all have to subtract it out independently.

341
00:32:57,000 --> 00:33:03,000
But usually companies put it in their overall costs, operating costs.

342
00:33:03,000 --> 00:33:09,000
And the reason we leave it there is because it does create a tax shield.

343
00:33:09,000 --> 00:33:17,000
See, I told you about the lens that I have $4,500 actually went out. But every year I subtract $900.

344
00:33:17,000 --> 00:33:22,000
There was no $900 anywhere in my purchase or use of the equipment.

345
00:33:22,000 --> 00:33:32,000
However, it does protect some of that revenue from getting taxed. It drops the net a little bit.

346
00:33:32,000 --> 00:33:38,000
So that's why we have to leave it in there so that we can have it do its tax shield there.

347
00:33:38,000 --> 00:33:43,000
But once that's happened, then we have to add it back in.

348
00:33:43,000 --> 00:33:55,000
The whole thing, depreciation expense, we add it back because it wasn't a real cash flow.

349
00:33:55,000 --> 00:33:59,000
And then we have to subtract a few things.

350
00:33:59,000 --> 00:34:07,000
And minus, traditionally we put these two in parentheses together and add them.

351
00:34:07,000 --> 00:34:15,000
The first one is capital expenditures, what you actually did spend.

352
00:34:15,000 --> 00:34:21,000
Capital expenditures, what you actually spent.

353
00:34:21,000 --> 00:34:35,000
And then this little bugger right here, the change in net operating working capital, Now.

354
00:34:35,000 --> 00:34:46,000
Here's the side calculation. Net operating working capital is your current operating assets

355
00:34:46,000 --> 00:34:50,000
minus your current operating liabilities.

356
00:34:50,000 --> 00:34:56,000
Now if you're paying attention, you're going to say, wait a minute, fat boy, why didn't you put the O in either of those?

357
00:34:56,000 --> 00:34:59,000
It's this.

358
00:34:59,000 --> 00:35:06,000
Most of your current assets are operating. Most of your current liabilities are operating.

359
00:35:06,000 --> 00:35:12,000
It's just that we kind of, current assets, we just take current assets.

360
00:35:12,000 --> 00:35:17,000
It's easier to do it, we're lazy. Current liabilities are the same way.

361
00:35:17,000 --> 00:35:27,000
Technically I could take out the non-operating current assets and the non-operating current liabilities,

362
00:35:27,000 --> 00:35:33,000
but life is short. We're not going to do that. Don't do it yourself.

363
00:35:33,000 --> 00:35:38,000
That's why you'll hear me sometimes say, I'm doing a dirty free cash flow.

364
00:35:38,000 --> 00:35:44,000
Because little minor things that I really should do, I don't.

365
00:35:44,000 --> 00:35:51,000
But the numbers come out very close to what they would be if I got in every tiny little detail.

366
00:35:51,000 --> 00:35:57,000
Okay, so in order to get net operating working capital for a year, I take the current assets of the year

367
00:35:57,000 --> 00:35:59,000
minus the current liabilities.

368
00:35:59,000 --> 00:36:13,000
Now the change would be delta, N-O-W-C, would be the net operating working capital for the current year, sub-zero,

369
00:36:13,000 --> 00:36:22,000
minus the net operating working capital for the previous year, sub-negative one.

370
00:36:22,000 --> 00:36:30,000
And that will tell me on net, has your net operating working capital gone up or gone down

371
00:36:30,000 --> 00:36:34,000
from the previous year to the current year.

372
00:36:34,000 --> 00:36:45,000
That would tell us how much cash has been freed up or depleted.

373
00:36:45,000 --> 00:37:00,000
If delta, N-O-W-C goes up, free cash flow is hurt, goes down.

374
00:37:00,000 --> 00:37:10,000
If net operating working capital goes down, then free cash flow is helped.

375
00:37:10,000 --> 00:37:26,000
See, because my net operating working capital goes up, that tells me that cash has been absorbed into your current affairs.

376
00:37:26,000 --> 00:37:33,000
If net operating working capital went down, that would mean that you have freed up some capital.

377
00:37:33,000 --> 00:37:36,000
Like suppose my inventories go down.

378
00:37:36,000 --> 00:37:44,000
Well, that means that I didn't spend as much money as I did last year, so that's more money in my pocket.

379
00:37:44,000 --> 00:37:53,000
If on the other hand current liabilities, wages payable, goes up from last year to this year,

380
00:37:53,000 --> 00:37:59,000
that would mean that I'm keeping some money in my pocket that I should have paid in wages.

381
00:37:59,000 --> 00:38:02,000
So that's the logic of that.

382
00:38:02,000 --> 00:38:05,000
Just put it as a sidebar calculation.

383
00:38:05,000 --> 00:38:11,000
It's one of those, if you've got it somewhere where you can get to it in notes or on a note card,

384
00:38:11,000 --> 00:38:19,000
it's an easy question that I almost always ask somewhere on a quiz or an exam.

385
00:38:19,000 --> 00:38:23,000
Sometimes I do it more than once.

386
00:38:23,000 --> 00:38:30,000
At first it seems counterintuitive, but the more you do it, the more it kind of makes sense.

387
00:38:30,000 --> 00:38:39,000
But anyway, here it is, the free cash flow calculation in a nutshell.

388
00:38:39,000 --> 00:38:47,000
So we'll do that first so that you can see how we use Excel.

389
00:38:47,000 --> 00:38:51,000
Now, a couple of things, and I think I said this in the last class.

390
00:38:51,000 --> 00:38:57,000
In your professional work, you should use the keyboard and not the mouse.

391
00:38:57,000 --> 00:39:03,000
I do the mouse in this class because you wouldn't be able to see what I'm doing on the keyboard.

392
00:39:03,000 --> 00:39:06,000
Anyway, I still use the mouse sometimes.

393
00:39:06,000 --> 00:39:12,000
I can't remember every keyboard command to get something.

394
00:39:12,000 --> 00:39:20,000
Now, the second thing is, this is what you would be expected to do, just what I'm going to do here.

395
00:39:20,000 --> 00:39:28,000
This would be basic stuff that you would be expected to just do in a corporate job,

396
00:39:28,000 --> 00:39:34,000
to work out models, to do some financial model.

397
00:39:34,000 --> 00:39:42,000
So kind of follow along and keep yourself informed about, well, can I do this on my own?

398
00:39:42,000 --> 00:39:44,000
Would I be able to do this?

399
00:39:44,000 --> 00:39:51,000
If the answer is yes, you should be able to say, I know Excel.

400
00:39:51,000 --> 00:39:54,000
Well, at least that gives you a little more justification.

401
00:39:54,000 --> 00:40:01,000
If this is fogging you, then I'll work with you for the rest of the course, getting you up to speed,

402
00:40:01,000 --> 00:40:03,000
and that's why I require the certifications.

403
00:40:03,000 --> 00:40:05,000
This isn't just finance.

404
00:40:05,000 --> 00:40:11,000
This is any kind of corporate job where you'll be expected to use Excel from time to time.

405
00:40:11,000 --> 00:40:16,000
So here we go, calculations, the worksheet.

406
00:40:16,000 --> 00:40:25,000
I clicked on it, and I'm going to type up here at the top, free cash flow.

407
00:40:25,000 --> 00:40:27,000
Free cash flow.

408
00:40:27,000 --> 00:40:29,000
I'm going to jump down a line here to start this.

409
00:40:29,000 --> 00:40:32,000
Now, what are the pieces we're going to need?

410
00:40:32,000 --> 00:40:37,000
Okay, I'm going to need operating income.

411
00:40:37,000 --> 00:40:40,000
I can pick that up off the income statement.

412
00:40:40,000 --> 00:40:42,000
I don't have to do revenue and costs.

413
00:40:42,000 --> 00:40:44,000
It'll be there for me.

414
00:40:44,000 --> 00:40:45,000
It has to be.

415
00:40:45,000 --> 00:40:46,000
That's required.

416
00:40:46,000 --> 00:40:58,000
Free operating income or EBIT.

417
00:40:58,000 --> 00:41:02,000
Okay.

418
00:41:02,000 --> 00:41:08,000
Now, the next thing I'm going to need is the tax rate.

419
00:41:08,000 --> 00:41:12,000
And that is always going to be 21%.

420
00:41:12,000 --> 00:41:19,000
Now, you can put.21 or you can type T, 21%.

421
00:41:19,000 --> 00:41:27,000
I usually do it as a percent just because it's visually more elegant to show what we would say in language.

422
00:41:27,000 --> 00:41:30,000
Well, the top tax rate is.21.

423
00:41:30,000 --> 00:41:33,000
Now, the top tax rate is 21%.

424
00:41:33,000 --> 00:41:36,000
That's why I do it in more common language there.

425
00:41:36,000 --> 00:41:38,000
Okay, what else are we going to need?

426
00:41:38,000 --> 00:41:47,000
Well, that means that with those two, I can get no pat.

427
00:41:47,000 --> 00:41:58,000
Then the next thing is I'll need the depreciation expense.

428
00:41:58,000 --> 00:42:12,000
Below that, I'll need the capital expenditures.

429
00:42:12,000 --> 00:42:18,000
And then I'm going to have to do a little bit of quick side calculation.

430
00:42:18,000 --> 00:42:22,000
First, I'll need the current assets.

431
00:42:22,000 --> 00:42:27,000
Well, let's do it this way.

432
00:42:27,000 --> 00:42:38,000
And I'll need the current liabilities.

433
00:42:38,000 --> 00:42:49,000
And from those two, I can get the net operating working capital.

434
00:42:49,000 --> 00:42:56,000
And I don't abbreviate too much in here because that just makes me go faster and leaves you further behind,

435
00:42:56,000 --> 00:43:00,000
especially when you go back to look.

436
00:43:00,000 --> 00:43:15,000
And then from those two, I can get the change in net operating working capital.

437
00:43:15,000 --> 00:43:29,000
And those all will leave us with nothing but the calculation of free cash flow.

438
00:43:29,000 --> 00:43:50,000
Now, up here, I'm going to on row two, the one that I jumped, I'll put 2023, 2022, and 2021 across from B to C to D.

439
00:43:50,000 --> 00:44:03,000
And I'll let you catch up here for a minute.

440
00:44:03,000 --> 00:44:06,000
Okay.

441
00:44:06,000 --> 00:44:12,000
Lock and load.

442
00:44:12,000 --> 00:44:14,000
Operating income.

443
00:44:14,000 --> 00:44:18,000
If you don't know how to do this, watch.

444
00:44:18,000 --> 00:44:20,000
I'm going to say equals.

445
00:44:20,000 --> 00:44:25,000
Now, operating income is going to come on the income statement.

446
00:44:25,000 --> 00:44:31,000
So I say equals, then I click on the worksheet called consolidated statement of operations.

447
00:44:31,000 --> 00:44:34,000
And I prowl around here.

448
00:44:34,000 --> 00:44:36,000
There it is.

449
00:44:36,000 --> 00:44:38,000
EBIT, they call it.

450
00:44:38,000 --> 00:44:44,000
And I click on that 799 at cell B17.

451
00:44:44,000 --> 00:44:54,000
And I just hit enter. And there it is.

452
00:44:54,000 --> 00:45:04,000
And then I can just grab that little, whoops, grab that little, what the heck?

453
00:45:04,000 --> 00:45:05,000
Why is it doing that?

454
00:45:05,000 --> 00:45:20,000
Why did I change that?

455
00:45:20,000 --> 00:45:24,000
What in the world is going wrong here?

456
00:45:24,000 --> 00:45:38,000
Okay. Now, see that 799? I'm just going to put the cell I'm on and then just drag it over.

457
00:45:38,000 --> 00:45:49,000
And it copies the previous years.

458
00:45:49,000 --> 00:45:54,000
Now, NOPAT.

459
00:45:54,000 --> 00:45:59,000
NOPAT will be equal to, whoa, let me do something here real quick.

460
00:45:59,000 --> 00:46:04,000
In cell E, I'm going to, for you, I'm going to upload this later this evening.

461
00:46:04,000 --> 00:46:12,000
In cell E3, I'm going to type where I got it.

462
00:46:12,000 --> 00:46:16,000
Income statement.

463
00:46:16,000 --> 00:46:27,000
And the tax rate in cell E4, given.

464
00:46:27,000 --> 00:46:30,000
Okay, so now NOPAT.

465
00:46:30,000 --> 00:46:39,000
NOPAT is nothing but equal to operating income times, open parenthesis,

466
00:46:39,000 --> 00:46:46,000
one minus the tax rate at B4.

467
00:46:46,000 --> 00:46:47,000
But I've got to be careful here.

468
00:46:47,000 --> 00:46:52,000
I'm going to hit F4 right now to make that an absolute reference

469
00:46:52,000 --> 00:46:58,000
so that when I drag it across, it leaves that 21% in place.

470
00:46:58,000 --> 00:47:03,000
Close the parenthesis, there.

471
00:47:03,000 --> 00:47:05,000
Why does it keep doing that?

472
00:47:05,000 --> 00:47:12,000
Now I'm going to take this and drag it across from 2023 through 2021.

473
00:47:12,000 --> 00:47:19,000
And over here in the E column, I'll write calculated.

474
00:47:19,000 --> 00:47:26,000
If I try to not look at the keyboard and talk.

475
00:47:26,000 --> 00:47:33,000
Okay, so there we go.

476
00:47:33,000 --> 00:47:39,000
Let you catch up to me.

477
00:47:39,000 --> 00:47:43,000
Now you're pretty proficient in Excel as far as getting things done,

478
00:47:43,000 --> 00:47:46,000
but I do want to not run over you on this.

479
00:47:46,000 --> 00:47:50,000
Now the depreciation expense, B6.

480
00:47:50,000 --> 00:47:54,000
Now the best place to get this is off the statement of cash flows,

481
00:47:54,000 --> 00:47:56,000
because I know it will be there.

482
00:47:56,000 --> 00:47:58,000
It could be in the income statement too,

483
00:47:58,000 --> 00:48:01,000
but I know it will be in the statement of cash flows.

484
00:48:01,000 --> 00:48:09,000
So I'll say equals, and then I'm going to shuttle over here to the statement of cash flows.

485
00:48:09,000 --> 00:48:22,000
And there it is in the statement of cash flows on cell B6, 916.

486
00:48:22,000 --> 00:48:27,000
Now I'll scoot that one all the way over.

487
00:48:27,000 --> 00:48:41,000
And then I'm going to type in the E column for that one, statement of cash flows.

488
00:48:41,000 --> 00:48:48,000
This will help guide you back if you wonder where I got things.

489
00:48:48,000 --> 00:48:54,000
Now the next one is a little bit of a, you're going to have to remember something.

490
00:48:54,000 --> 00:48:59,000
The capital expenditures are going to be in the statement of cash flows.

491
00:48:59,000 --> 00:49:04,000
However, they are reported there as a negative.

492
00:49:04,000 --> 00:49:08,000
You don't want that because you're going to subtract them right there.

493
00:49:08,000 --> 00:49:12,000
So here's how we do that.

494
00:49:12,000 --> 00:49:16,000
In cell B7, capital expenditures, I'm going to say equals,

495
00:49:16,000 --> 00:49:20,000
and before I run over there and grab that in the statement of cash flows,

496
00:49:20,000 --> 00:49:24,000
I'm going to type ABS, open parenthesis.

497
00:49:24,000 --> 00:49:29,000
In other words, take the absolute value of this.

498
00:49:29,000 --> 00:49:35,000
And now I can go over to the statement of cash flows.

499
00:49:35,000 --> 00:49:38,000
Now, down here, let's go to the statement of cash flows.

500
00:49:38,000 --> 00:49:41,000
You go to investment, investing activities.

501
00:49:41,000 --> 00:49:43,000
You see, it's a negative.

502
00:49:43,000 --> 00:49:46,000
You don't want it to be a negative because you're going to subtract it.

503
00:49:46,000 --> 00:49:48,000
You follow?

504
00:49:48,000 --> 00:49:55,000
Now, you notice that there are other items below that.

505
00:49:55,000 --> 00:50:03,000
You don't want those because those are probably non-operating expenditures.

506
00:50:03,000 --> 00:50:05,000
You want that top one.

507
00:50:05,000 --> 00:50:10,000
In this sheet, it would be B25.

508
00:50:10,000 --> 00:50:16,000
Now, some people say, well, just take the net one at the bottom of the investing activities.

509
00:50:16,000 --> 00:50:18,000
I say you probably don't want to do that.

510
00:50:18,000 --> 00:50:21,000
Even if you did it, they're trivial.

511
00:50:21,000 --> 00:50:26,000
They're usually, in this case, there's only one that has a positive entry.

512
00:50:26,000 --> 00:50:34,000
But overall, these numbers after the big dog in B25, they're trivial.

513
00:50:34,000 --> 00:50:37,000
They're not operating anyway.

514
00:50:37,000 --> 00:50:44,000
So I'm just going to leave it, close my parenthesis, boom.

515
00:50:44,000 --> 00:50:52,000
Now, I'm going to take that B7 and I'm going to drag it across.

516
00:50:52,000 --> 00:50:57,000
I'm going to type that also.

517
00:50:57,000 --> 00:51:07,000
If you're wondering how I did that, the cell you want to copy from, you just put it on that cell and hit control C.

518
00:51:07,000 --> 00:51:15,000
And then you go to the cell where you want to paste it and hit control V if you want to do it fast.

519
00:51:15,000 --> 00:51:19,000
Now, we've done that.

520
00:51:19,000 --> 00:51:25,000
Now, current assets, well, those will be on the balance sheet.

521
00:51:25,000 --> 00:51:34,000
Equals, where the hell are current assets?

522
00:51:34,000 --> 00:51:40,000
Total current, come on, for heaven's sake, there they are.

523
00:51:40,000 --> 00:51:43,000
6943, cell B7.

524
00:51:43,000 --> 00:51:47,000
Okay, that one's done.

525
00:51:47,000 --> 00:51:53,000
Current liabilities, just go over and find those.

526
00:51:53,000 --> 00:52:03,000
Equals, go to the balance sheet, find your total current liabilities, which here are cell B22.

527
00:52:03,000 --> 00:52:18,000
Met operating working capital is just equal to cell B8 minus cell B9.

528
00:52:18,000 --> 00:52:31,000
Now, I can take those three cells, B8, B9, and B10, and I'm going to slide them over.

529
00:52:31,000 --> 00:52:35,000
But I'm going to take only one over.

530
00:52:35,000 --> 00:52:39,000
Why?

531
00:52:39,000 --> 00:52:41,000
Here it is.

532
00:52:41,000 --> 00:52:43,000
The balance sheet is only two years.

533
00:52:43,000 --> 00:52:45,000
I've got only two years.

534
00:52:45,000 --> 00:52:52,000
So if I slid it over another year, I'd get the error, pound symbol, and all that.

535
00:52:52,000 --> 00:53:07,000
Okay, now if I wanted, I could find the December 2021 entries for the balance sheet and put those in there, but life is short.

536
00:53:07,000 --> 00:53:21,000
So the change in net operating working capital for 2023, you just take cell B10 minus cell C10.

537
00:53:21,000 --> 00:53:26,000
And there it is, negative 912.

538
00:53:26,000 --> 00:53:35,000
So your change in net operating working capital was $912 million.

539
00:53:35,000 --> 00:53:37,000
Look there.

540
00:53:37,000 --> 00:53:45,000
In other words, they freed up almost a billion dollars in free cash flow.

541
00:53:45,000 --> 00:53:53,000
They cut some things down that were current assets, increased some things that were current liabilities,

542
00:53:53,000 --> 00:54:05,000
and the net effect was to free up cash flow for the current year, for the year just ended, I should say.

543
00:54:05,000 --> 00:54:11,000
Okay, here's the holy grail, the free cash flow.

544
00:54:11,000 --> 00:54:17,000
And I'll be able to do this for only one year because I have only one year of change in net operating working capital.

545
00:54:17,000 --> 00:54:21,000
Equals, okay, go here, no pat.

546
00:54:21,000 --> 00:54:26,000
Where the hell is, up here at cell B5.

547
00:54:26,000 --> 00:54:41,000
Well, I've already done that, so plus depreciation expense, cell B6, minus open parenthesis, capital expenditures,

548
00:54:41,000 --> 00:54:53,000
plus change in net operating working capital, close the parentheses.

549
00:54:53,000 --> 00:54:59,000
And what will come out of there is what really happened, the real story.

550
00:54:59,000 --> 00:55:05,000
And it is, survey says, negative $117 million.

551
00:55:05,000 --> 00:55:16,000
In other words, they were in the hole in actual cash that they had to use to pay all of those other accounting entries.

552
00:55:16,000 --> 00:55:22,000
They were in the hole $117 million.

553
00:55:22,000 --> 00:55:25,000
That's not money, that's not just an abstraction.

554
00:55:25,000 --> 00:55:27,000
They had to have that money.

555
00:55:27,000 --> 00:55:34,000
In order to have paid those items that you saw in the rest of those financial statements, they had to have that money.

556
00:55:34,000 --> 00:55:38,000
So how did that happen? Where did it come from?

557
00:55:38,000 --> 00:55:41,000
Well, there are a couple of places.

558
00:55:41,000 --> 00:55:48,000
The first thing is, they could dig into their retained earnings.

559
00:55:48,000 --> 00:55:53,000
Now, retained earnings are one type of equity.

560
00:55:53,000 --> 00:56:01,000
This is what the company has put into the bank, as it were, over the years previous.

561
00:56:01,000 --> 00:56:05,000
The buildup of profits of the company are there.

562
00:56:05,000 --> 00:56:08,000
That would be the first place they would reach.

563
00:56:08,000 --> 00:56:12,000
That retained earnings belongs to the shareholders.

564
00:56:12,000 --> 00:56:15,000
We, in fact, have a name for it.

565
00:56:15,000 --> 00:56:25,000
The first place, well, they would dig retained earnings.

566
00:56:25,000 --> 00:56:28,000
We call that internally generated equity.

567
00:56:28,000 --> 00:56:39,000
This is the shareholders' money that was generated by its operations in the past.

568
00:56:39,000 --> 00:56:45,000
So that would be the first place you would go to get the money.

569
00:56:45,000 --> 00:56:51,000
Another kind of equity would be new stock.

570
00:56:51,000 --> 00:56:55,000
They could sell new stock.

571
00:56:55,000 --> 00:56:59,000
That would be called externally generated equity.

572
00:56:59,000 --> 00:57:02,000
New owners.

573
00:57:02,000 --> 00:57:12,000
Sell some stock and get the money to pay off, pay your bills.

574
00:57:12,000 --> 00:57:17,000
Or they could use debt, borrow.

575
00:57:17,000 --> 00:57:23,000
They could borrow to do it.

576
00:57:23,000 --> 00:57:29,000
Now, a couple of interesting things.

577
00:57:29,000 --> 00:57:33,000
Right away, they're in the hole $117 million.

578
00:57:33,000 --> 00:57:45,000
They have got to get that because that's how they're going to pay their bills that they weren't able to pay through their operations.

579
00:57:45,000 --> 00:57:50,000
That would be how they would pay other things.

580
00:57:50,000 --> 00:57:52,000
Let's look over here real quick.

581
00:57:52,000 --> 00:57:58,000
Let me pull up US Steel again.

582
00:57:58,000 --> 00:58:02,000
They paid a dividend.

583
00:58:02,000 --> 00:58:05,000
They gave their shareholders money.

584
00:58:05,000 --> 00:58:12,000
In other words, that's $117 million if you look back through where the numbers came from.

585
00:58:12,000 --> 00:58:17,000
Some of that is what they paid their shareholders in dividends.

586
00:58:17,000 --> 00:58:18,000
Now, understand this.

587
00:58:18,000 --> 00:58:22,000
If you don't pay your debt holders, they'll turn you off.

588
00:58:22,000 --> 00:58:30,000
They'll take you right into bankruptcy and you have to run to a bankruptcy court to protect you from them liquidating your company.

589
00:58:30,000 --> 00:58:35,000
But what can the shareholders do if you don't pay them a dividend?

590
00:58:35,000 --> 00:58:37,000
All they can do is cry.

591
00:58:37,000 --> 00:58:49,000
So why in the heck is US Steel paying its shareholders a dividend?

592
00:58:49,000 --> 00:58:51,000
Yeah?

593
00:58:51,000 --> 00:58:56,000
No, that wouldn't be it.

594
00:58:56,000 --> 00:58:57,000
Let's take you.

595
00:58:57,000 --> 00:59:00,000
Turns out you're my son.

596
00:59:00,000 --> 00:59:01,000
I know, easy.

597
00:59:01,000 --> 00:59:04,000
We're just doing a story here.

598
00:59:04,000 --> 00:59:09,000
Now, every year on your birthday, I give you $10,000.

599
00:59:09,000 --> 00:59:13,000
That's why you like me.

600
00:59:13,000 --> 00:59:21,000
Now, this last year, I've been having problems, lost my job, and I'm getting back on my feet.

601
00:59:21,000 --> 00:59:25,000
But I'm still going to give you that $10,000.

602
00:59:25,000 --> 00:59:30,000
Why?

603
00:59:30,000 --> 00:59:33,000
Any idea?

604
00:59:33,000 --> 00:59:35,000
So you'll still like me.

605
00:59:35,000 --> 00:59:40,000
Dividends are given to shareholders as a signal.

606
00:59:40,000 --> 00:59:43,000
They signal we're doing okay.

607
00:59:43,000 --> 00:59:46,000
Everything is fine with our company.

608
00:59:46,000 --> 00:59:58,000
In fact, the Wall Street boys, if I don't pay a dividend, those Wall Street firms that have massive amounts of my stock in their portfolios, they're going to kick my ass.

609
00:59:58,000 --> 01:00:00,000
They're going to sell my stock.

610
01:00:00,000 --> 01:00:10,000
They're going to have a conference call with us and put the squeeze to our board of directors to get rid of upper management and to get rid of the board itself.

611
01:00:10,000 --> 01:00:16,000
Yeah, I'm going to give that dividend just to keep them from getting upset.

612
01:00:16,000 --> 01:00:26,000
It's part we didn't understand it for a long, long time why companies would give dividends even if they were in great trouble.

613
01:00:26,000 --> 01:00:35,000
And then came along 20 years ago signaling theory, which had been around forever, and it answers the question.

614
01:00:35,000 --> 01:00:36,000
It's a signal.

615
01:00:36,000 --> 01:00:37,000
We're doing okay.

616
01:00:37,000 --> 01:00:38,000
Don't worry.

617
01:00:38,000 --> 01:00:40,000
Everything is okay.

618
01:00:40,000 --> 01:00:43,000
And that's what's going on here.

619
01:00:43,000 --> 01:00:47,000
US Steel is going to keep paying its dividend saying everything's good.

620
01:00:47,000 --> 01:00:48,000
We're fine.

621
01:00:48,000 --> 01:00:49,000
We're fine.

622
01:00:49,000 --> 01:00:52,000
Just to keep that from happening.

623
01:00:52,000 --> 01:01:01,000
Now, something much more important, let me take you back to the spreadsheet and let's have a quick look here.

624
01:01:01,000 --> 01:01:08,000
Free cash flow is negative $117 million.

625
01:01:08,000 --> 01:01:12,000
Now, it doesn't take a rocket scientist to figure that that's a bad thing.

626
01:01:12,000 --> 01:01:13,000
Oh, but wait a minute.

627
01:01:13,000 --> 01:01:19,000
Let's look at what the accountants say and what all the talking heads say.

628
01:01:19,000 --> 01:01:21,000
Oh, US Steel, well, look at this.

629
01:01:21,000 --> 01:01:27,000
Their net earnings are positive $895 million.

630
01:01:27,000 --> 01:01:28,000
Great company.

631
01:01:28,000 --> 01:01:30,000
By God, slap them on the ass.

632
01:01:30,000 --> 01:01:33,000
They're doing good.

633
01:01:33,000 --> 01:01:35,000
We know they're not.

634
01:01:35,000 --> 01:01:38,000
That's the whole problem with accounting.

635
01:01:38,000 --> 01:01:43,000
It isn't showing what really happened.

636
01:01:43,000 --> 01:01:45,000
You, madam, are my daughter.

637
01:01:45,000 --> 01:01:53,000
You come in wearing a nice suit, looking great, hair really good.

638
01:01:53,000 --> 01:02:01,000
You put some heavy makeup over the tattoo you got because you were dating a biker named Nick.

639
01:02:01,000 --> 01:02:03,000
So you had Nick on.

640
01:02:03,000 --> 01:02:05,000
Okay.

641
01:02:05,000 --> 01:02:13,000
But if I were to do a CT scan of you, eww.

642
01:02:13,000 --> 01:02:21,000
You, I told you, you know, my doctor said if the body is a temple, you, Professor Crane, are a Baptist revival tent.

643
01:02:21,000 --> 01:02:23,000
Yeah.

644
01:02:23,000 --> 01:02:27,000
Inside, we know you're not doing okay.

645
01:02:27,000 --> 01:02:34,000
That's what's going on here is the accounting financial statements are telling a surface story.

646
01:02:34,000 --> 01:02:48,000
And we have to dig in because we are responsible for advising on investments, for preparing a company to fix the problems instead of pretending they aren't there.

647
01:02:48,000 --> 01:02:50,000
That's what we do.

648
01:02:50,000 --> 01:02:57,000
And that's why you'll see this company is profitable, nearly a billion dollars profit, by golly.

649
01:02:57,000 --> 01:02:59,000
And we're looking at it.

650
01:02:59,000 --> 01:03:00,000
No, it's not.

651
01:03:00,000 --> 01:03:02,000
It's bleeding.

652
01:03:02,000 --> 01:03:07,000
Bleeding $117 million in real free cash flow.

653
01:03:07,000 --> 01:03:10,000
That's the whole thing.

654
01:03:10,000 --> 01:03:15,000
There are many, many companies and billionaires and millionaires.

655
01:03:15,000 --> 01:03:18,000
On paper, they're fantastic.

656
01:03:18,000 --> 01:03:23,000
But in reality, they are a disaster.

657
01:03:23,000 --> 01:03:32,000
And oftentimes, they and all of the media and all of their acolytes just keep telling them damn good.

658
01:03:32,000 --> 01:03:33,000
You're great.

659
01:03:33,000 --> 01:03:34,000
You're awesome.

660
01:03:34,000 --> 01:03:38,000
And no one has the guts to say you are a mess.

661
01:03:38,000 --> 01:03:40,000
And that's what we have to do.

662
01:03:40,000 --> 01:03:44,000
That's why we are different in our world.

663
01:03:44,000 --> 01:03:48,000
We have to tell the truth, not just to the investors, but to the company.

664
01:03:48,000 --> 01:03:51,000
We have to speak the truth to the power.

665
01:03:51,000 --> 01:03:54,000
And that's what's going on here with U.S. Steel.

666
01:03:54,000 --> 01:04:00,000
So now digging in, and I'm not going to do a lot of this today.

667
01:04:00,000 --> 01:04:02,000
I'll save it for Monday.

668
01:04:02,000 --> 01:04:04,000
The ratio analysis.

669
01:04:04,000 --> 01:04:11,000
And if you look back, did I delete that Dagon sheet?

670
01:04:11,000 --> 01:04:12,000
Well, let me pull it back up.

671
01:04:12,000 --> 01:04:14,000
It should be in downloads.

672
01:04:14,000 --> 01:04:16,000
Yeah.

673
01:04:16,000 --> 01:04:25,000
Financial analysis sheet.

674
01:04:25,000 --> 01:04:27,000
Now, these ratio...

675
01:04:27,000 --> 01:04:28,000
Oh, shut up.

676
01:04:28,000 --> 01:04:29,000
Quit it.

677
01:04:29,000 --> 01:04:30,000
Leave me alone.

678
01:04:30,000 --> 01:04:31,000
Get off of me.

679
01:04:31,000 --> 01:04:32,000
Okay.

680
01:04:32,000 --> 01:04:36,000
Now, this sheet, these are the ones...

681
01:04:36,000 --> 01:04:39,000
Almost all of these are in your textbook, too.

682
01:04:39,000 --> 01:04:43,000
But here's a sheet with just these on it.

683
01:04:43,000 --> 01:04:49,000
You might want to even get this made into a poster and put it up in your living room.

684
01:04:49,000 --> 01:04:50,000
It's just...

685
01:04:50,000 --> 01:04:52,000
Okay, maybe not.

686
01:04:52,000 --> 01:04:59,000
But there are a few in here, I can think of one, that isn't in your book.

687
01:04:59,000 --> 01:05:06,000
It was around for decades, but then somewhere along the way, it just fell out of favor.

688
01:05:06,000 --> 01:05:15,000
Well, in the past couple of years, this ratio has begun to be really, really important.

689
01:05:15,000 --> 01:05:18,000
And companies are beginning to pay attention to it.

690
01:05:18,000 --> 01:05:21,000
Investment analysts are beginning to pay attention to it.

691
01:05:21,000 --> 01:05:29,000
In fact, here at Illinois State, a course that went away years ago was brought back.

692
01:05:29,000 --> 01:05:33,000
And they looked around and they saw me and they said, okay, you can teach us.

693
01:05:33,000 --> 01:05:35,000
Well, yeah, I can.

694
01:05:35,000 --> 01:05:38,000
It is about the most boring course you could ever want.

695
01:05:38,000 --> 01:05:40,000
It sucks the life out of you.

696
01:05:40,000 --> 01:05:42,000
It just turns you into beef jer...

697
01:05:42,000 --> 01:05:45,000
No, anyway, but it's so important.

698
01:05:45,000 --> 01:05:47,000
It's the cash management course.

699
01:05:47,000 --> 01:05:51,000
And I've got a ratio we used to use, but we haven't used.

700
01:05:51,000 --> 01:05:55,000
It's in the liquidity ratios, this burn ratio.

701
01:05:55,000 --> 01:05:58,000
It's also sometimes called the cash ratio.

702
01:05:58,000 --> 01:06:03,000
Matter of fact, quick ratio, you'll oftentimes hear that called the acid test.

703
01:06:03,000 --> 01:06:10,000
But these two, and especially this cash ratio, suddenly, well, gee, cash is king.

704
01:06:10,000 --> 01:06:14,000
If you can't survive in the short run, there ain't no long run.

705
01:06:14,000 --> 01:06:16,000
So that one's in there that you won't see in the book.

706
01:06:16,000 --> 01:06:24,000
And the rest of these, again, if you use them enough, you'll memorize them, as I have.

707
01:06:24,000 --> 01:06:27,000
Matter of fact, sometimes you'll even see me go back to this sheet.

708
01:06:27,000 --> 01:06:32,000
It's more important that you know what they're telling us, what they're saying,

709
01:06:32,000 --> 01:06:38,000
what the whispers are behind those raw numbers that you see on financial statements.

710
01:06:38,000 --> 01:06:44,000
So the liquidity ratios, they simply say how many times over can you pay your current assets

711
01:06:44,000 --> 01:06:47,000
with your current liabilities?

712
01:06:47,000 --> 01:06:51,000
So in other words, if I've got a liquidity ratio of 1.0,

713
01:06:51,000 --> 01:06:56,000
I've got just enough current assets to pay my current liabilities.

714
01:06:56,000 --> 01:06:58,000
If it's much above 1, well, that's one thing.

715
01:06:58,000 --> 01:07:01,000
If it's much below 1, that's another thing.

716
01:07:01,000 --> 01:07:03,000
Things like the asset activity ratios.

717
01:07:03,000 --> 01:07:06,000
There's that inventory turnover ratio I was telling you about.

718
01:07:06,000 --> 01:07:12,000
This tells you how hard your assets are working for you.

719
01:07:12,000 --> 01:07:18,000
The profitability ratio is similar.

720
01:07:18,000 --> 01:07:27,000
It's actually measuring in percentage what your profit margins are.

721
01:07:27,000 --> 01:07:31,000
Your gross margin, your operating margin, your net margin.

722
01:07:31,000 --> 01:07:34,000
Now that's important because when you're comparing two companies,

723
01:07:34,000 --> 01:07:40,000
their raw numbers could be vastly different, millions versus billions.

724
01:07:40,000 --> 01:07:46,000
But if we turn them into percentages, then we're comparing apples to apples.

725
01:07:46,000 --> 01:07:53,000
And then we can compare a billion-dollar company with a $10 million company.

726
01:07:53,000 --> 01:07:55,000
And that's the way it is with a lot of these.

727
01:07:55,000 --> 01:07:59,000
I'll just go through a couple of quick ones with you to finish the day.

728
01:07:59,000 --> 01:08:05,000
Okay, ratios.

729
01:08:05,000 --> 01:08:06,000
Come down here.

730
01:08:06,000 --> 01:08:10,000
First one, we'll do liquidity, and that's the only ones I'll do today.

731
01:08:10,000 --> 01:08:12,000
A couple of those.

732
01:08:12,000 --> 01:08:17,000
Now the current ratio.

733
01:08:17,000 --> 01:08:26,000
The quick ratio, which is sometimes called the acid test.

734
01:08:26,000 --> 01:08:36,000
And then the burn ratio, sometimes called the cash ratio.

735
01:08:36,000 --> 01:08:38,000
And these are just like I did before.

736
01:08:38,000 --> 01:08:40,000
All you do is go to the different sheets.

737
01:08:40,000 --> 01:08:43,000
The liquidity ratio, the current ratio.

738
01:08:43,000 --> 01:08:46,000
That's current assets over current liabilities.

739
01:08:46,000 --> 01:08:51,000
Equals, go over here to the balance sheet.

740
01:08:51,000 --> 01:08:53,000
Okay, where's current assets?

741
01:08:53,000 --> 01:09:00,000
Total current assets divided by total current liabilities.

742
01:09:00,000 --> 01:09:05,000
And that's about 1.76.

743
01:09:05,000 --> 01:09:13,000
That means that they can overall, if they liquidated all of their current assets today,

744
01:09:13,000 --> 01:09:19,000
they could pay all of their current liabilities 1.76 times over.

745
01:09:19,000 --> 01:09:26,000
Now the units on these are, for these ratios, are time symbols.

746
01:09:26,000 --> 01:09:35,000
Now the quick ratio is similar, but it says, yeah, but, I mean, really, you take your current assets.

747
01:09:35,000 --> 01:09:37,000
Fine.

748
01:09:37,000 --> 01:09:38,000
Total current assets.

749
01:09:38,000 --> 01:09:44,000
But inventory, you can't liquidate that at what the accountants say.

750
01:09:44,000 --> 01:09:50,000
If you had to get rid of your inventory today to generate cash, you might get 10 cents on the dollar.

751
01:09:50,000 --> 01:09:58,000
So the quick ratio subtracts out the inventory.

752
01:09:58,000 --> 01:10:06,000
And then takes the result and divides it by current liabilities.

753
01:10:06,000 --> 01:10:12,000
Well, they can still cover 1.2122 times over their current liabilities

754
01:10:12,000 --> 01:10:17,000
with their current assets that actually can be liquidated pretty quickly.

755
01:10:17,000 --> 01:10:21,000
The burn ratio simply says this.

756
01:10:21,000 --> 01:10:26,000
The reality is that if you had to pay all of your current liabilities today,

757
01:10:26,000 --> 01:10:31,000
the only thing that you could really draw would be your cash.

758
01:10:31,000 --> 01:10:45,000
So the burn ratio, the cash ratio just says, just take your darn cash and divide it by your current liabilities.

759
01:10:45,000 --> 01:10:52,000
And that one is pretty low.

760
01:10:52,000 --> 01:10:55,000
It's not terrible.

761
01:10:55,000 --> 01:11:08,000
Now, liquidity ratios, if they are too low, the company doesn't have enough liquidity.

762
01:11:08,000 --> 01:11:18,000
However, if they're too high, that would tell me that they are not using their liquid investments

763
01:11:18,000 --> 01:11:23,000
to turn those into long-term higher yield investments.

764
01:11:23,000 --> 01:11:29,000
If I've got money in my pocket, $1,000, well, I'm highly liquid.

765
01:11:29,000 --> 01:11:37,000
But at least some of that money I could put into stocks or bonds or something like that and get a much higher return.

766
01:11:37,000 --> 01:11:44,000
So those liquidity ratios, you don't want them to be through the roof because that's saying you're wasting money.

767
01:11:44,000 --> 01:11:49,000
An example of this very quickly, Netflix.

768
01:11:49,000 --> 01:12:00,000
Three or four years ago, they borrowed over a billion dollars and they borrowed it at a stupidly high interest rate.

769
01:12:00,000 --> 01:12:05,000
Everyone would say, okay, boy, I wonder what they're going to put that into.

770
01:12:05,000 --> 01:12:10,000
Well, they're at sat in their current assets as cash.

771
01:12:10,000 --> 01:12:13,000
And everyone would say, what the hell?

772
01:12:13,000 --> 01:12:23,000
You're paying a high interest rate on this money, on this capital, and you're putting it into your money market accounts where you earn barely anything.

773
01:12:23,000 --> 01:12:26,000
It was just absolutely ridiculous from our perspective.

774
01:12:26,000 --> 01:12:30,000
As it turned out, they were explaining it like this.

775
01:12:30,000 --> 01:12:36,000
Look, we have to have highly liquid resources.

776
01:12:36,000 --> 01:12:46,000
So if we see a new TV show that we can get into production out of the script and into the can, we need to be able to do that within a few months.

777
01:12:46,000 --> 01:12:58,000
If we see the prospect of being able to take over another studio like Paramount or whatever, we need the money to be able to strike right away on that.

778
01:12:58,000 --> 01:13:02,000
So that was why they were explaining that transactions motive.

779
01:13:02,000 --> 01:13:08,000
They wanted all that still liquid so that they could use it quickly.

780
01:13:08,000 --> 01:13:11,000
We still thought, oh, God, this is ridiculous.

781
01:13:11,000 --> 01:13:17,000
Over the last few years, they've been peeling it down to more sane levels, but still.

782
01:13:17,000 --> 01:13:25,000
So in other words, you're seeing how these ratios, you have to think about them both ways, too high, too low.

783
01:13:25,000 --> 01:13:27,000
We'll pick it back up on Monday.

784
01:13:27,000 --> 01:13:29,000
But for today, that's all I have for you.

785
01:13:29,000 --> 01:13:33,000
I thank you.