Alan Cring Productions in association with Emergent Light Studio presents the Illinois
State Collegiate Compendium, academic lectures in Business and Economics.
This is Business Finance, FIL 190 for spring semester 2024.
Today the time value of money and let me get myself together here.
However, before we do TVM, begin that anyway.
I will finish up ratios and do some analytics and also have more fun with spreadsheets as
I'm sure you are already getting the awareness, if you didn't have it already, that it was
these are actually the work horses of the entirety of finance these days.
Now I haven't had a chance yet to, I don't know whether it's released or it's about to
be released, but Python is about to be embedded into the spreadsheets as well.
It's kind of a way for you to sneak in some pre-learning about Python if you haven't ever
done it before, but I would also encourage you to try out.
LinkedIn Learning has a, I think it's a three course sequence in Python.
It starts out really light weight.
I kind of like the way the teacher of it, it doesn't ramp you up like here's a big bunch
of code, now let's figure out what happened in here.
It's a better lighter weight approach, but as I've said before, you're really going to
need about anywhere you go in finance these days, at least two of the four heavies, Python,
R, C++ and Java.
It doesn't hurt for you to get a little bit of a feel for SQL as well.
SQL isn't that hard.
You can see what the purpose of your command line entries is a lot more cleanly in SQL.
Sometimes it's hard to figure out where the heck you're heading in a language like Java
or a language like R. Anyway, we'll talk about that as time goes
along and you might even see me.
We're going to do spreadsheets.
Of course, you saw them last time.
They're going to be here this time and from now on almost every class is going to have
spreadsheets in it.
To the extent that you can keep up and know what you're doing, you can create spreadsheets
for a lot of the problems that you would encounter on midterms and quizzes.
I'm going to help you show you how to craft nice clean spreadsheets that will solve different
kinds of problems for you.
But anyway, to start off today just as a start off today kind of exercise that we do every
day, let's do this thing called let's look at the numbers.
And well, okay, I'm going to try this.
Sir is this a bowl or a bear day?
Let me expand that screen a little bit for you there.
Bear with me.
Whoops, that didn't do it.
It's a bowl day.
It is a weak bowl day.
It's not a moo.
It's sort of a ee.
It started off actually, it's been trying to talk itself into having a good day.
But it's really, it just doesn't have much punch in it.
As you can see, the Dow and the S&P are vying for boredom today so far.
And the NASDAQ is up more, of course, obviously, it's a higher risk portfolio and that's what
you're going to get.
You're going to get a bowl day.
It's going to be a little more of a bowl day usually on the NASDAQ.
But there's really not much to talk about here on this on a day like this.
A lot of weight you can see right now.
Markets despite, well, let me not get into that too much here.
It gets to be a little political.
There was a little bit of more talk than usual on back channels about some things that happened
politically that were said this weekend that kind of rattled international markets.
It did kind of rattle.
It just sort of shocked the hell out of them.
But anyway, let's go on here.
And over here on crude, crude had dropped, it was going down.
And then as you can see, there was a bull rally coming along.
It's up above the surface of the water.
But I want you to notice something.
I may have already said this, but let me emphasize it again.
If you see how these spark charts are short, we just started the day off, the bell bing,
ding, ding, ding, about an hour ago or so.
But if you look over here at this oil, well, that's been going on.
That's how it works.
The commodities markets are clockers.
They're running all the time.
And the futures markets drive you crazy.
Because in the futures markets, they all have like a four hour quiet period.
But when they start back up depends upon the commodity.
So you might have beef start at one time, some kind of beef futures start at one time,
and oil starts at another time, and then wheat starts at another time.
It just drives me crazy trying to keep track of when the times are that these markets get
quiet, and then when they wake up.
As you can see, oil's been rolling here for probably, it looks like about eight hours
right now already.
So these markets don't behave the way your classic stock market or your bond market works.
It's just something you kind of get used to.
See how long gold's been running for the day?
So it's not the same markets we think in, lightweights in the market think in terms
of the bell of the New York Stock Exchange, that big ding, ding, ding bell.
Well that's just one part of the whole world of financial markets and commodity markets
and all of that.
They have different time frames.
And I just wanted to point that out to you.
Depending upon what kind of, if you are into the world of investments, of trading, you're
going to have a different time frame than others would.
Even in corporate, if you're in treasury, you might have to be there at an early hour
to handle some of the stuff that's going on in the world markets that have that impact
on your corporation.
So we don't get to have, sometimes in some areas of finance, we don't get to have the
regular eight to five jobs, just the way it is.
And of course, see the currency markets?
There you go.
Those have been going on.
They're just, obviously those are going to be trading all the time because you're talking
about the euro, which would be the euro against the dollar.
And then you've got the Great Britain pound against the dollar.
See how long that's been trading so far today?
And the Japanese yen, I don't know.
But anyway, okay, so getting back over here to bonds, you see that there was a very steep
drop.
Right off the bat, it was instantly down, which would mean yields were instantly up
on the bond market today.
But that rallied really quickly as this would have been a lot of buying activity, pushing
the price up at the bell and therefore driving the yields down.
I've got to keep my order here.
But then that pressure, that buying pressure on the bonds really eased up and was replaced
by more of a balance on the sell side to the point now where we're virtually at dead stop
from where it closed last night.
And right now, as you can see, 0.2 basis points, which would be 1 one thousandth of a percent
because one basis point is a hundredth of a percent.
So a 0.002 would be a thousandth of a percent, or 0.2 basis points.
So getting the thinking, one of the things that I do in this course is to get your eyes
to see what is actually there.
Instead of a mass of numbers, you see the numbers and then you can begin to interpret
what those numbers mean.
And as far as everything else goes, on the other side of the world, the Nikkei, I'm not
sure what was going on, but it started on a bull spike, a couple bull spikes there, and
then it just tailed off.
There was struggle through the day, but by the end the bears had taken control and it
finished virtually flat from where it started.
So it was kind of a rollicking day on the Tokyo exchange.
Now in London, bull spike at the beginning and then it just dropped off, and then it
more or less stayed about the same until just the last few hours.
There's been a bull rally, but that was cut off very quickly, and now they're still trading
over there at the end of the day.
It's just sort of struggling to hold its head above water.
So there you are on that.
But just to have a look, who's coming up soon here?
One quick thing, look at the VIX.
Now you remember what the VIX is?
Do you remember?
It's okay.
You'll get the hang of it.
VIX?
Vol.
It's vol.
It's a metric of volatility.
And you can trade it.
So let's see how the volatility is going right now.
Well that's, hmm, very interesting.
It was resting, little bit of index drop, but then it's had this little spike in here
in the last hour or two.
It's coming off that top of that spike right there.
But there seems to have been some volatility that was reflected.
Let me look back here real quick just to see.
Can we see that here?
Yeah, see it?
See the volatility?
It was down there in the spike.
That's a volatility spike.
And that's what you're seeing over there with the VIX itself.
See it?
That's that.
So in other words, this is a raw.
The stocks, you can see volatility in the portfolios, in individual stocks, ETFs, all
that.
But when you look at it, this is sort of taking away the stocks themselves, the underlying
companies, and just saying what is the behavior of this thing that is representing how those
stocks are moving up and down as a whole.
And as you can see, there's some spike in that.
Now when that spike stays up there, we'll talk about that a little later.
But anyway, it's going through.
I don't know, anyone got a stock to look at today?
Great recommendation for how I can make money?
You.
Oh, go ahead.
Oh, I was going to say L-beauty, like D-L-F.
I have heard of that.
Where have I heard that?
Oh, decent.
Expensive, kind of expensive.
Oh, it's riding high.
Let's have a look at it.
Well, okay, your turn.
Risky or not risky?
Oh, it's risky.
Risky is not horrible like a Tesla or one of those like AMD, but that's noticeable.
Now if I'm looking at the P-E ratio, I see overvalued there.
I see it at 78.
You're getting up there in the high range on P-E ratios asking for a pull off.
But at the same time, whoa, look at that spread.
Well, it is $175 stock, but that's still.
For bid is what you will get if you sell it to a broker.
Ask is what you will pay if you buy it from a broker, which the book takes it the other
way.
The bid is an ask or exactly flipped from the broker's point of view.
Well, that's good, but from our point of view, what I'm saying is the way you should think
about it.
Oh, look at that though.
Whoa.
52 week rate, 67.59 to 179.58.
So we are near the top of the 52 week on this.
And if we were to look at the one year, and is there some reason that this sucks?
Okay.
If we look at the one year, why do these look so weird today?
Okay, look at that.
Okay, now, a technical analyst.
And I feel like I'm telling you how to do something that's evil.
A technical analyst would say, you've got rising tops, you've got rising bottoms.
That is a sign of a buy.
That's a buy sign.
At least that's in the intermediate.
This is an intermediate.
If I look at it over here, I still kind of see rising tops, but I don't see the rising
bottoms really.
I see no clear indication one way or the other over a longer haul.
But in the intermediate, I do see the rising tops.
And honestly, the way I was taught how to do it, you print out one of these charts,
and then you take a ruler and you draw the lines through the tops.
And you didn't have to do it perfectly, but you wanted to do it kind of so that you could
see where might be a crossing point, where rising tops and rising bottoms crossed each
other or something like that.
So you could tell where there might be a signal to do something.
But in general, we just drew a line through these tops and a line through the bottoms.
We would see these rising tops and rising bottoms.
And then you look for a point where the line of the tops and the line of the bottoms crossed,
and that was supposed to be a trigger of some kind.
That was old school technical analysis.
But as far as looking at this goes, okay, well, I can do this.
I can do this.
Well, I don't get this.
They had earnings that were supposed to have been reported.
The earnings call, February 6th.
They're past that, but there's no mark that tells me what happened to them.
So they may not have given their final earnings report yet, even though they've done an earnings
call.
So that would tell me that the rumor right now is that there's going to be—let me get
back to the one day.
Okay.
This is really driving me crazy what YIHA is doing today.
Speculation.
The speculation it looks like.
Now, I told you, I don't—well, I've got to remember.
Sometimes I don't remember what I tell you.
There's an old saying, buy on the rumor, sell on the news.
So if there's a rumor that it's going to go up, then what you do is you buy into the
rumor that it's going up.
But if there's anywhere close to that when the news is going to come out, no matter whether
it's on your side or against your side, get the hell out of the way.
That's an old—and it's still been—I still hear that one to this day among traders.
So in other words, the rumor would have been earnings above what they were forecasting
and now that we're getting close to the news or almost on the news, get out of the way
of it because it's not going to be good for you.
Any good news would already have been impounded in the price.
You're not going to get anything else out of it if the company announces, well, we did
good.
You're not going to get any more out of it at that point.
But especially if you had good rumors and then the news is sour, you surely want to
be out of the way of that one.
And it goes the other way too.
If you hear that it's going to be bad, get out of the way of it while you hear it's
going to be bad.
And then when the news comes out, then you just sit there and hang out, just wait.
It's not going to be perfect, but it's a way we survive in the business.
It's like when I was in the service.
You're not always going to come out with no scratches or no scrapes or no holes in you,
but if you keep following the rules over a period of time, you're going to be one of
those people who lives to tell the stories when you're an old man or an old woman.
Anyway, strong volume.
Look at that, strong volume.
It's already at about a fourth of its volume, no, a third of its volume for the day and
we're not that much into the day yet.
And again, these things that I'm doing here, this is when I get the chance for you who
are finance majors to hear how we think.
I'm talking out loud, I'm thinking out loud as I'm looking at these so that you can hear
it and it gets to be part of your thinking as you go forward in your classes and then
into your careers in finance, wherever it is.
Anyway, any other ones before I go on?
Yeah?
USFR.
You've got to point things out.
Okay.
No, the year chart.
Or like, max.
Whoa, look at that, year chart?
Max.
Oh.
Whoa, what the hell is that about?
You see the volume bars?
See the vol bars?
The volume bars there?
Now when I say vol here, I don't mean volatility, I mean volume.
The vol bars are, whoa, something really got the market interested in this for a while
and then it sort of dropped off the face of the earth.
Anything?
Any observations here?
Okay.
Yeah, this is, what is this, an ETF?
Oh, I see what it is, okay.
Treasury fund rate.
Yield?
You don't have a PE on that, probably.
It's flat, so it's not correlated.
If you see that the beta is right there about zero, what that's telling you is that it is
completely uncorrelated to the market.
It lives its own life.
And I'll do this for you right now, you don't have to know this yet.
But beta is the correlation between the security
and the market times the standard deviation of the security over the standard deviation
of the market.
That's what beta is.
That's row.
Row is the Pearson correlation coefficient.
Have you had your stats course yet?
Have you done that one yet?
Okay, you're nodding your heads.
This is the correlation between the stock and the market.
We'll do these, they're actually easy in Excel.
They're almost like a joke.
But then multiply that times the standard deviation of the stock divided by the standard
deviation of the market.
So in other words, you're scaling the standard deviation of the stock by the standard deviation
of the market.
When I see a beta of zero, my first impression is, oh, that's a correlation coefficient between
this security and the market of zero.
That doesn't mean that, see that standard deviation up there on top, that could be a
mother, that could be a very big number.
But if it's times by zero, then the beta will be zero on it.
And in this case, if I look at, oh, let me look at just the one month chart.
Hello, kitty, what the hell happened there?
Dropped off the face of the earth.
When did that happen?
Oh, that was probably the Fed's announcement.
This is a Treasury Board playing field.
It just dropped off, and then it's groveling back up again here.
That might have been some kind of hellacious portfolio adjustment back there a few days
ago, about a week or two ago, during the Fed's latest announcements.
But one way or the other, the thing, as you can see, there's some rather scary volatility
there.
So let me look at the five day, just to, oh, that thing is nasty.
That's volatility.
But it's going to have a beta of zero, because it's uncorrelated to the market, probably
because this is uncorrelated with the stock market, with the market portfolio.
That's why you need to know the formulas, because behind the formulas, you can figure
out why the heck things do what they do sometimes.
But there you go.
Did you have a particular investment recommendation on this one?
Okay, that's good.
That's good, because I don't know, that might be something to play, but look how quiet it
is so far this morning.
Half a million shares against five million on the typical day over the last year.
So it's lying low right now.
It's being very quiet for one reason or another.
Yeah, see it?
Look, it's just sitting there looking stupid.
It's not even moving anywhere right now.
So apparently, whatever this thing, Animal, is, and I honestly have no idea, I think I'll
research it though, it's telling me that it's sort of off the table right now.
Someone's staying away from it, or most of the investors are kind of just, what is it
going to do next?
I don't know.
I don't even know what you would do with that in a portfolio, but it's just kind of sitting
there, has no beta.
So I mean, if you had a high, your portfolio's beta was way above what you wanted it to be.
You put that in it, and that'll bring the beta down.
That's one of those things with portfolio control theory, is if you've got a beta that's
away from where your target beta is, loading something that is of a much different beta
will sometimes be what you need to do to calm down the activity, the high beta or low beta,
which is above what you want.
Anyway, let me get on to some, let me crank here for a little bit.
This is student view of your spreadsheets, and I'm just going to go back in and finish
up what I had done before.
Now in case you didn't see it, in your canvas, go to files.
I'm going to slow down here so that you can get on board with me.
Go ahead and crank.
Unless you are in files, I've set up a subfolder.
Go to spreadsheets.
You'll see that there's a subfolder called class spreadsheets.
Those are the ones, that will be where I do one in class, and then I put it in here for
you.
And this will fill up, and this is sort of like an archive as we go along, and it might
be useful to you as time goes on.
Now up in the main folder, I have built spreadsheet templates for almost every kind of mathy type,
quantitative, I shouldn't say mathy, quantitative type of problem there is.
And we're going to build those together, and you're going to see how it's done.
And this is going to strengthen you in Excel.
Ultimately, in the long run, the reason I'm giving you the term assignment with the chat
GPTs, a lot of what we're doing in Excel, we will be able to do with low level AIs.
You can do with low level AIs.
It's just going to be a matter of having the world catch up to what we're doing.
Right now, in corporate America, there is a lot of skepticism, and a lot of misinformation,
and lack of information about AIs.
They could be doing things right now at insanely greater speed than they are, because they're
still doing it in Excel.
And you have to also understand that there is a survival kind of thing.
All of these older corporate executives, even if they knew that the AIs, a chat GPT, that
could be written in a matter of an hour without a whole lot of technical skill, can do anything
that their Excel spreadsheets can do, even if they knew that, they wouldn't like it,
and they wouldn't want you to do it that way, because that's the end of all their years
of learning Excel, getting power in the corporation through their expertise, and all those sheets
that they wrote, they built, they're obsolete now.
So you think they're going to embrace AI very quickly?
Well, they, no, no, they won't.
They will, it'll take you guys coming into the workforce about five years to make it
so that everything that they did, a lot of what they did, is obsolete.
Yeah, we still go into battle with a sword.
Well, now we've got these cannons, and then we've got now the drones, and we can do all
that.
Yeah, but I still like my sword.
Okay, good.
And also I got a Flint spear, a Flint Point spear.
That's good too.
I built it myself.
You're going to get that mentality.
We ride it.
But you guys have got to know the frontier, but you also have to know the Excel too.
Okay, now, class spreadsheets.
We're going to pull up US Steel.
Nope, that was a stupid thing.
You don't click on it, because then it's going to show up in that idiotic window.
You download the thing.
There we go.
US Steel, double click on it.
Close.
Enable editing.
Now, one thing that...
It's a plus side and a downside.
I could do things in here, and I could teach you how to do macros, so it would make a lot
of this go somewhat faster.
But macros have a visual basic in them, and when you try to email one to anyone, especially
in our university system, the university system is going to pee itself.
Oh God, oh God, that's a macro.
That's going to virus us.
Well, we can do viruses a lot better than that now, but that's how it goes.
So I could show you macros, but I won't show you macros, because then you couldn't email
them to anyone.
Anyway, okay.
Now, the one that I put up here is somewhat different.
I did a little rearranging so that I had the years in columns instead of as I had done
it before.
And we've gotten the free cash flow, and we saw that US Steel does have some diminishment
of its free cash flow, and it's negative.
However, now we want to go to the ratios, and let me get back over here into Canvas
and pull up that ratio sheet for you.
Financial analysis formula.
And I'm going to download that again.
There we go.
Just like that.
And we'll walk you through.
Again, in a course like this, we can get the ratios calculated in Excel.
A chat GPT can do it.
I just found out that the stupid AI on my phone can tell me the ratios.
I was driving here, and I just said, I'm not going to yell it out loud because that mindless
thing is going to watch me.
But I just called the name of the AI.
They're now, the newest ones are AI when you just ask it a question.
And I just asked it for one of the ratios for US Steel, and it spit the thing out.
Within a couple of seconds, it gave me the most recent ratio.
So there you are.
I hear loud noise, and I say, oh, active shooter.
I mean, it's a pretty bad world we live in.
When someone comes into class late, and you're, oh, that's the end of it there.
I guess that's that.
God, it's a bad world we live in, especially for you guys.
Although I have to say, I'll probably off the teacher first.
You pissed me off.
Bam.
Oh, should have given him an A. Anyway, laughing through the graveyard.
That's what that is.
OK, look, but the focus for us is on the why in these.
We can let low level people, the accountants do this, the calculations.
But we then ask what went on here.
Now there are some that are, a few of them are a pain in the ass to calculate these days
because they are not directly in the financial statements.
Like daily credit sales.
That one, you can use accounts receivable divided by 360 or 365.
Now what about 360 versus 365?
You'll be seeing that in Excel a lot, where you have to tell it whether you want to use
360 or 365.
It's a toggle in a number of financial formulas.
You use 360 for some calculations.
You use 365 for other calculations.
And sometimes you use both of them in the same calculation, believe it or not.
So I'll get to that in a little while here.
But let's crank on through.
How far did I get?
I think I got the liquidity ratios.
Yeah, I got the liquidity ratios down.
So now going back over there and seeing what's next.
I got all the liquidity.
Now let's do the profitability.
I do apologize for doing these sort of out of order.
I normally just do liquidity ratios first.
Profitability, well, so we're going to do profitability next.
By the way, a minor point, in learning Excel, don't format as you go along.
Get everything done and then go back and format.
You're slowing yourself down.
Well, that should be a bold and that should be an italic.
I should indent that.
Do that later.
Okay, so now in the profitability ratios, we're going to crank through here.
And I see gross margin, operating margin, and net margin.
Those are the big margins.
Gross margin, operating margin, operating margin.
Do I have to have someone, a helper, because I can't type anymore?
Operating margin and net margin.
Now I want to caution you one thing.
One of these is used in, it's just very old, saying gross margin.
A lot of times a business will use gross margin and not be referring to the percentage.
They'll just be referring to the after cost of goods sold divided by the, or revenues
minus after the gross income.
But for us, we're going to go over here, consolidated statement.
All this one will be is your, and I didn't do it, did I?
Let me stop here before you do anything else.
I keep forgetting that they didn't do the gross margin.
I'm going to go to the income statement, insert, and I apologize, I forgot about this, gross
margin, gross income.
And that will be nothing but equals the revenue minus the cost of goods sold.
And then I'm going to copy it over.
Drives me crazy that they do that.
Okay so, now we've got it.
So we can now go over and do the ratio.
Gross margin is going to be your gross income divided by your cost of goods sold, your total
revenues.
Now that one is a percent.
You will have house rules about how many decimal places you use.
Some houses, four decimal places.
Others, six.
The typical in, the old one used to be two decimal places as a percent.
And in the problems that I give you, if it's a percent, you round it to two decimal places.
A minor side note, I give, depending upon the problem, I give you some leeway if you did
a rounding error or something like that.
So if I ask this question on a test or a quiz, then I would take any answer between 12.42
and 12.50 as being correct.
I wish I could make you have some partial credit for a little bit more than that, but
Canvas doesn't let that happen.
So keep that in mind.
A little rounding error happens sometimes.
So there's gross margin.
Now take this, what does this tell us?
This says that of every dollar the company took into the cash register, about 12.50 survived
wholesale costs.
Let me say that again.
That number, 12.46%, is saying that out of every dollar that came in as revenue, once
you'd paid the wholesale cost, you still had 12.50 cents about.
Now that's a little surprising in a way.
I mean, you know, that's all?
That's not unusual for big, heavy industrial companies.
They are so laden with things that they have to buy to get a product made that you'll see
this.
Now I'm going to drag some of these over here a little bit.
I should have done that before, just so we can see some number comparisons.
Now look at this though.
Right off the bat, do you see that two years ago, U.S. Steel was keeping about 28 cents
of every dollar after wholesale?
And that has plummeted, plummeted to 12.50 cents of every dollar.
Any problems we see with this company, we're seeing them up here at the top of the store.
Now operating margin equals, now we're going to go back over here.
Now this one is nothing but operating income, that's EBIT, divided by your sales.
I really don't like the way they've got this financial, this income statement laid out.
Hello Kitty.
Good grief.
What?
Well let me tell you, by about any standard, I mean it wasn't that spectacular back there
a couple of years ago, but now, holy Toledo, only.4 cents of every dollar of sales survived
clear, down to the bottom, to the operating line.
Okay well let's look at net margin, just to have a real wall.
Equals, now we're going to go over here and we're going to get the net income, net earnings,
divided by the sales.
Did I even do that other one right?
Let me do this one again, equals operating income, earnings before EBIT, divided by, oh
thank God, I must have done something wrong there.
Whoa, still ugly.
Now percent, shift two decimal places.
That's interesting, must have had some kind of tax shield protect them, but look at that,
these are not good numbers at all.
These are not good numbers at all.
Now let me do the other ones here, and I will put this back up on the web once I'm finished
today.
Net margin, okay so now we're going to go back over, we should be getting ROE and ROI.
Return on assets would be next.
Return on assets, I'll just put in here return on equity.
Now let's go back over here, return on assets.
That's going to be, if you look at it, net earnings, net income over total assets for
the first one.
So we got return on assets.
Now on this one we're going to go over here and we're going to get the total sales divided
by, now this one we have to shoot over here to the balance sheet.
You're beginning to see why I put those sheets all together in a cluster so I could jump
back and forth.
And if you can't do it as fast as I'm doing it, by all means that doesn't mean there's
anything wrong with you.
You'll get there.
Let's see this one.
Oh, that's, what?
Let me try that again.
Equals, oh I did the wrong number.
Net income with an apology.
Talking and chewing gum at the same time.
Net earnings divided by total assets.
That's better.
Turning that into a percent at two decimal places and then scooting it over.
Yep, we can't do that one because the balance sheet had only two years.
But as you can see the return on assets has plummeted.
Now what does that mean?
That is telling us that if the total assets of the corporation, working assets, intangible
assets were a portfolio and you invest in the, that was your investment, was that portfolio,
all the assets of the company, this is what your return for the year would have been.
Now the return on equity, you're going to go over and you're going to take net income,
net earnings divided by the total shareholders equity.
There's something that sucks.
There it is.
God I hate these.
Yeah, these sheets are a little bit.
Okay.
Percent.
Now what the return on equity tells you is the value of the company that belongs to the
shareholders.
What did you return?
What did the company return on that capital?
In other words, taking into account only what the shareholders own, the total shareholders
equity, how much did that return last year for 2023?
And as you can see, it has plummeted too.
One thing that will always be true, and I'm saying this because I ask it on a quiz, I
ask it on an exam, what...
Okay.
Let me frame this.
The return on equity will always be at least as large, probably larger than the return
on assets.
Especially because if you look at the formulas for the two, look here.
In return on assets, you're dividing by the total assets, which is the equity plus the
liability.
In the return on equity, you're dividing by only part of that, the equity part.
So that means that return on equity will be smaller than the equity will be smaller than
the total assets.
The number for equity will be smaller than the number for total assets.
And therefore, return on equity, you'll be dividing by a smaller number than you will
be dividing by for the return on assets.
That's why the return on assets will always be smaller than the return on equity.
Because you're dividing the return on assets by a number that is larger than the number
you're dividing in the return on equity.
How much larger?
Well, that depends on leverage, and I'll bring that up.
Now, the dividend ratio.
This one...
I mean, if you've got market data, you have to go and look at what the dividend is currently,
the current dividend for US Steel.
And then you would divide that by net income.
I'm going to do that, but I would not ask that of you on an exam.
Dividend ratio.
So for the dividend ratio, I'm going to need the dividend, the dollar dividend divided
by the net income.
So I'm going to just quickly run over here for just a second, go to Yahoo Finance, and
look at US Steel very quickly.
And again, I wouldn't ask you to do this.
But the dividend that they just paid was 20 cents per share.
Well, I still can't do it because I need the total number of shares outstanding.
Well, I can do that.
Again, though, I'm not going to ask you to do that.
But I will say that it will equal 20 cents divided by...and then I'd have to go over
here to the income statement and hope I have the net income per share.
Did they do it?
There it is.
Now, the question is, do you use the basic or do you use fully diluted?
Earnings per share.
Now, the fully diluted says, if stock that has not been issued yet, all got issued, that's
the number we would use as the divisor.
This one, it says the number of shares that are actually outstanding right now.
Typically we just use basic.
So the dividend ratio as a percent is 5.08.
Whoa.
It's gone up.
Now, the plow back ratio would be 1 minus that because they give 5% of every dollar
to the shareholders, which must mean that they keep 1 minus that to plow back into the
company.
Again, this is just saying the net income, whatever the net income was, they gave 5%
of it back to the shareholders this last year.
Which means that the other 94.97%, 95%, they put back into the company on behalf of those
shareholders to grow the company.
That's what that's telling us.
Now one side note here.
If the company is losing money, you don't count, you don't do these.
You just say NA.
If the company had negative net earnings, you just say not applicable.
So technically I would say if that ratio is less than zero, then NA.
That was way too much like work.
Okay, now enough of those.
Going back over to the ratios, we'll do asset activity right now.
Let's do asset average.
Asset activity.
Asset activity average collection period.
We're going to do the asset activity.
And the first what we'll do is average daily collection period.
Is that what we call it?
Let me look here and make sure I'm using the same terminology.
Average collection period.
I didn't mean daily.
Average collection period.
And then there's two more of these if I recall correctly.
There is inventory turnover and total asset turnover.
Inventory turnover and total asset turnover.
Now the average collection period.
If you look at this, what it's going to tell you is you take the accounts receivable and
then you divide that by the average daily credit sales.
The problem is that you would need total credit sales to do that one.
And that's not going to, it used to be on the income statement, but it no longer is.
That one is actually buried in the notes usually these days.
So you're not going to get it by any normal means and I would never ask you about it.
However, the next one we can do, inventory turnover, sales over inventory.
So sales over inventory.
I'm going to just put a couple of lines here.
Oops, I didn't mean to do that.
By the way, for a non-applicable pound, NA equals NA open close.
Equals NA open close.
Inventory turnover.
Now again, if you look at the formula, it's sales over inventory.
Sales, we'll go to first of all to the statement of operations.
Sales divided by, and then we go over here to the balance sheet.
Inventory, come on, come on.
There it is.
And we'll scoot that to, let's say, four decimal places.
Whoops, didn't mean to do that.
Well, try this again.
Really, two would have done it.
Well, let me do two.
And then I'm going to copy that over.
Now what this tells us is how many times a year the company cleared its warehouses and
replaced what was in them with new stuff to sell.
Let me say that again.
You don't need to copy it word for word.
But this is how many times in the year the company sold everything in the warehouse and
replaced it with new stuff to sell in the warehouses.
And as you can see, this hasn't changed too much.
This is saying that about eight and a half times a year, or about every month and a half,
they sold everything and replaced it with new stuff to sell.
It has dipped a little bit, but that's not enough.
They've slowed down.
You see how they've slowed down a little bit?
The turnover has gone down a little bit.
Now you get these companies that, well first of all, service companies, you really can't
talk about inventory turnover.
But if it's a manufacturing company, you'll see an inventory turnover ratio.
And it simply says how efficiently is this company working?
And as I told you, it's great when that number goes up.
You don't need as much warehouse space because you're getting rid of everything, just replacing
it as fast as you can.
That's wonderful until you get a supply chain choke, which happened when all these companies
had been so obsessed for decades with getting that inventory turnover ratio up there.
In other words, clear it out of the warehouse, order more.
Clear it out of the warehouse, order more.
And then suddenly where they ordered it from said, we can't get it.
You're stocked out.
You're done.
That's the downside.
The upside of increasing the inventory turnover ratio is you don't have as much cost of warehouse
space.
The opportunity cost of the warehouse space and the lighting and all that and the security,
it goes down as your inventory turnover ratio goes up.
But there is that downside to it.
Now total asset turnover.
Again, like the company is one giant value, product.
How many times over did you do that?
Did you actually clear that value and then renew it in a given year?
So you would have in that one equals the, consolidated sales, equals the total sales
divided by the total assets of the company.
We'll make that one two decimal places and then we'll scoot it over.
So they really slowed down.
And if I've noticed right, US Steel did put in a lot of new assets.
So there would have been a lot more value to turn over.
So that could explain why this one dropped so much compared to the inventory turnover.
Because here all you're doing is turning over the inventory.
Here you're turning over the whole company.
In the case like US Steel, if we look back to the balance sheet, do you see how their
property plant and equipment went up?
They'd have more that they'd have to clear out.
You notice how there's almost like a puzzle going on here.
These numbers are telling us a story, but we've got to figure out what the story is that they're
telling us.
Okay.
Okay here we go.
Price to earnings ratio.
That's the price per share divided by the earnings per share.
Now neither of those is going to be, those are, okay let me write this down here.
Prices.
Now the market ratios, price to earnings and market to book.
Okay so the price to earnings, those are unfortunately you'd have to get the market price divided
by the earnings per share.
And that's hard for, we can do it.
We can get the price divided by the earnings per share.
If you go over here to Yahoo, Yahoo Finance, I can get the price per share, which is $46.31,
equals $46.31 divided by, going back there and finding their earnings per share at their
last report, is $3.56.
Now this will not be the same number that Yahoo is reporting.
And the reason is simple.
Because the EPS that they're going to use is not the same one that's this old one, stale
one that's in their financial statements for the end of last year.
So it's going to be, it's almost not worth it to try to calculate these in a traditional
ratio manner.
Just get them from a service.
However, the market to book is very interesting.
In your textbook, they give you a ratio, in another chapter, they give you a market value
and an enterprise value.
Now the one that they teach you is take the market value of the company minus the book
value of the company.
You don't want to do that because the companies that are worth a billion, you couldn't compare
with the companies that are worth a million.
The way we do it is this.
Market to book.
We're going to go first of all equals to the market cap of the company.
That we get here.
The market capitalization of the company is 10,377,000,000.
So I'm going to put that in first.
10,377,000,000.
Now you've got to be careful with this calculation because the balance sheet might not have it
in the same units.
So I want to divide that.
I'm going to go over here to the balance sheet and then go down here to the total shareholders
equity.
But I've got to make sure that that is also going to be reported in millions.
There it is.
So it is reported in millions.
So I can go ahead and write this.
Where the hell is that thing?
That right there.
There it is.
Total United States Steel Stockholders Equity.
Shit.
That's not good at all.
Let me make sure that was reported in billions.
Yep.
10,377,000,000.
Now let me go back over here to the balance sheet.
Whoops.
Didn't mean to do that.
It's being reported in millions, so it's 10,777,000,000 divided by the total stockholders equity.
11.
So it's 10 divided by 11.
Oh, that's grim.
Let me explain.
Sir, I had told you this before and you didn't believe me, but you are my son.
Join me or die.
No.
Sorry.
Now I put in, I've got receipts.
I put in a quarter of a million dollars to create this adult.
But now I'm doing the calculation for actuarial purposes to see what your true market value
is.
The present value of your future expected earnings.
And it comes out to be $5 million.
So in other words, the market to book would be $5 million divided by 250,000 or 20.
That's a measure.
How much did you become from what I put in?
That's what market to book does.
Normally we'll see these anywhere from maybe 5 to 50 to 100 in some cases.
In other words, the company has turned the actual physical money that shareholders gave
it and the money that was belonging to the shareholders after all bills had been paid,
retained earnings over the years.
In this case, the company has done nothing other than almost retain the value of what
was put in.
That's not good at all.
This company has not done jack with all of the money.
See the total shareholders equity is an accounting number.
No question about that.
What it does tell us, stockholders bought stock, they put it into the company, the company
earned money, paid its bills and what was left belonged to the shareholders.
You put those two together, that's what that accounting number, total shareholders equity
is.
It's the actual count of those dollars.
And what have they done with those?
According to the market value, they haven't done anything but barely keep the money that
was invested by the owners.
So in this case, that number just sucks.
But that is an important number.
It's one of those numbers that you'll hear almost any analyst somewhere along the line
will say, well, market to book is.
And the higher it is, the more value that company has created from every dollar that
shareholders contributed, either through buying the stock or not getting dividends.
So that the company plowed it back into operations.
In this case, US tail is just sitting there looking stupid with that money.
You go to a bank, you put in $10,000 and the bank says, well, we've got $930,000.
That's $9,393.50 now.
That's what that's saying.
And that's a bank that you wouldn't want to be in business with.
That's grim.
And the year prior, it was a little better, but that still sucked.
This is an ancient company.
It should have market to book of at least 20.
And yet here it is sitting here looking stupid.
Well, we kind of kept almost all of it that was put in.
So that's why this number is actually kind of important in a transcendent way among ratios.
It's a long haul number.
I'm done with you.
I'm going home.