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Alan Cring Productions in association with the Emergent Light Studio presents

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the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.

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This is Business Finance, FIL 240 for spring semester 2024.

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Today, time value of money. We'll finish up the ratio analysis and then move on if we have time to time value of money.

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We're going to look at the numbers and then I made arrangements for a guest speaker to come in and have a quick talk with you about markets,

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bull and bear markets, to give you some real world background in the subject of market performance and all that.

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Before we do that, let's look at the numbers. Madam, whoa, there's a dead screen. I was just testing you.

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Try that again. There, there's your screen. Okay, madam, bull day or bear day? Bull.

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You got to say bull. Okay, well, not, no, it was actually, but then it died and the bears took over.

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It was up, you see how it was up and then it just dropped off the face of the earth in the last hour or so.

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The Dow was still up a little bit, but it's tailing down. So we're probably going to end up the day as a bear market,

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but it was bull, see it was bull all through the day and then suddenly something weird happened.

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I'm sure that's not going to happen with my guest speaker here, a very bullish investor.

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But as you can see, it's not a spectacular day at all, which is kind of weird because the Dow is the only one that's doing well

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and the S&P is down a little bit and Nasdaq's down a little more.

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So you're getting that bear market showing up and it's magnifying the riskier the portfolio, the more down it is,

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except for the Dow, who knows what that's about. But moving over here to crude, crude oil,

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the bears were really pushing the price of crude down through the last, since last night and this morning.

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But then there was just this bull spike, it popped up for some reason and now it's just kind of bobbling around.

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Some information that pushed the price up right there, but as you can see, once that information had been absorbed,

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it just stayed there because there was no more information to push it one way or the other.

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But we're still not, I mean the price of gasoline isn't going to go anywhere significant right now.

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Although there was concern over the weekend, and I got some of that scuttlebutt,

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about a certain politician who made some really kind of scary claims about inviting our enemy to attack our allies,

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but that kind of rattled everyone for a while, but we got over it and figured, well, that's tomorrow's problem.

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Now, going over here, gold and silver about dead in the water right now.

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Over here, what's the 10-year bond? Notice it had an odd inverted V pattern.

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It began with yields down, prices up, which means that there was buying pressure.

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But then, after a while, that buying pressure came off and then there was selling happening.

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And then, right now, it's down here, which means that the buying pressure has begun again,

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and we've got a drop here, yields are falling, prices are rising,

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so you've got bond investors jumping back in on the backside of the day, down in here.

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Keeping a little bit of mind on this number right here, this is the current yield on the benchmark, 10-year treasury.

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We watched that to get an idea of where interest rates in general are going.

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Now, it has fallen a lot from where it was, even a few months ago, so that means interest rates are going down.

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There's kind of a holy grail I've been hearing.

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We're looking for, within the next couple of months, to see if it's going to break below 4%, 4%.

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I mean, with interest rates falling, that's great for business activity, consumer spending, confidence, and all of that kind of stuff.

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We are loving this, and so we're kind of looking at, will it actually, before the spring, well, before mid-spring, make it below 4%.

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That would bring car loans back down to same levels, mortgage rates would start to behave themselves like they had for the last few years,

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and all of that would be good news for you, business activity increases, and we've got a strong employment market right now, getting people getting jobs and all this.

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So, let's kind of keep an eye on that, see if we can creep down slowly toward that crossing into the 3% range from where we are now, 4.17 and a little bit of change.

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But right now, it has fallen a little bit, there's a drop of 1.4 basis points, so yay for that.

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We need to get it down 17.2 more basis points.

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Rolling over here to see what's happening on the rest of the world.

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There was some good news in Tokyo at the beginning of trading last night, last night in our time,

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and bulls had their fun, but then the bears came in and they smacked it down, the bulls kind of groveled back,

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but by the end, the selling had brought it back down to almost flat for the day.

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If I'm looking at that correctly, yeah, barely up from the beginning of the day.

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London, I heard some fellow, he's over in Britain, he said, we have an inverted London Bridge happening right now.

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The bulls were opening it up, pushing upward, and then the bears just slapped it right back down and held it down underwater.

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In the end, the bulls had a rally, which didn't last, but by the end, I think, yeah, we're about at the end now.

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Yeah, they've closed now for the day.

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It was up just 1 one-hundredth of a percent, so it was basically flat for all of that excitement up and down, flat for the day.

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I have to show you one. There are these stocks called penny stocks.

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They run anywhere from a couple of cents up to a couple of bucks, and they're fun to throw money at because you know you're probably going to lose.

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Well, Friday, there was a company called BMR. It was the penny stock, and then today, 658% increase in one day.

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That would be like you put $100 into it on Friday afternoon, and then today, you collect $650 from the investment in the stock.

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Just insane. You don't see that hardly ever.

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Anything of that magnitude, a penny stock that just blew the doors off on its way up.

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From what I can gather, all of the excitement is about their video technology, which is what Microsoft and several others are now trying to get ready to put into the next generation of Xbox and all of that, or PS2, Sony,

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is where you use artificial intelligence in its predictive configuration where it knows what's going to happen or it has a very high probability of what will happen in the next millisecond in a video.

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Then it can make that happen on its own to create this perfectly smooth, extraordinarily realistic looking environment, even in three dimensions.

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Apparently, this little pissy company has made some pretty impressive advances, which may be embraced by the big dogs because it looks stable and it looks like it's ready for production, or at least close to it.

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That's as far as I can hear. It's just a company. It doesn't have a beta. Its PE ratio is not applicable because it's losing money. You don't have a PE ratio if EPS is below zero.

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It doesn't pay a dividend, but there you are, right there. Just a monster explosion on the company.

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That does happen. Dreams do come true, but it is very, very rare. Most penny stocks, they stay that way forever. This one is sort of like a Cinderella tale.

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If you want to throw money at penny stocks, you can point to this and say, sometimes it happens. Anyway, enough of that.

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Now, as I said, before I go on to anything else, I had a guest speaker here. I told him I'd give him a little bit of time. He's here to talk about bull markets.

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Good afternoon. I'm the bull, and I'm here to tell you about bull markets. I want to encourage you to invest because the sky's the limit. The bull market lives forever.

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I have never seen a bear market in my life. In fact, I'm pretty sure that there is no such thing as a bear. There is no such thing as a bear.

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In fact, I think the bear is a... Holy milkshake!

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I am the bull market.

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Racial analysis. This is a rough business. Okay, now, let's go to Canvas.

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Where the hell was I? Okay, here. First thing we're going to do is pull up the financial analysis formulas. Now we're going to download them.

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Now, as I have said, you may have this sheet with you for anything you want. Bring it to a quiz. Bring it to an exam. It is yours.

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As a matter of fact, I make a poster out of it, a big poster, and hang it in your room. This is something that will be a conversation starter.

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When you start talking about ratios at a party, that party gets lit. So here we go. This is for you. My hair. I got fur in my mouth.

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Oh, like that helped at all. Oh yeah, it did. Now, look. The next thing we're going to do is over here in files, the one thing that you want to do here is you find your spreadsheets.

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Spreadsheets. I hate how they do this. Okay, now, in spreadsheets, something that you'll find there now that's new is class spreadsheets.

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This is where examples that I do in class in Excel, they're just company examples, I will put them in this class sheets folder every evening after I've done work on them.

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So you can pull it up there and have everything right. That doesn't mean you don't put it in Excel. Use your Excel. By all means, while I'm doing this.

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Because you've got to get the feel of how Excel works. Because the whole business world sort of rests on the shoulders of Excel and some other things right now.

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And soon enough, Excel will become married to Python and just shortly after that, Excel will become just completely embedded within chat GPTs.

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And so that's something that's important for you to pick up too. And I'm trying to get a mini course together in building chats that are for business.

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But anyway, class spreadsheets. And we've got US Steel up here right now. And so I'm going to pull up US Steel as a download.

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I'm going to download it and then we can work on it here together. There we go. Top one. Yes, absolutely.

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Now I'm going to go through these ratios with you. And make along the way, write down the explanations.

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As I've said, I am not really too excited about you showing me that you can do this number divided by this number.

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In my business, in our world of finance, we need to know what those numbers are telling us.

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Certainly, it's going to benefit us to do the Excel calculations and get the numbers in there.

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But then that's not where we stop. That we actually say, okay, why did this happen? What does this number tell us?

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Instead of just saying, I'm done. I've got the numbers. I can go home.

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So as we go through these, I'm going to also be pointing out a few stupid pet tricks in Excel as I proceed with the doing US Steel.

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A couple of... Okay, right off the bat, formatting. Don't format...

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A few things you can format, but don't go through and format every blessed number and every blessed word.

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Well, I want that one bold. I better stop doing what I was doing and make it bold or italics.

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Don't do that. Wait until you've got it done and then go through and make it pretty.

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That's just basic efficiency. Do one task at a time and then you'll have everything right instead of getting yourself confused like I do all the time.

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But you'll also see me along the way just quickly doing something just so you can see, okay, this is how you do this formatting trick or that formatting trick.

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But right off the bat, we have the liquidity ratios, as you can see. And this mouse is going to be the death of me.

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It's double clicking all the time now. So anyway, so we've got these ratios. We started last time with liquidity.

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And now what I'm going to do is I'm going to copy the liquidity ratios over so that it captures the previous two years.

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Like that. Yep, this mouse has about had it now. Seriously. Control C, Control V, Control V.

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My God, this mouse is about, now it's about dead. Control C, Control V. Oh boy. I might not have a mouse today.

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I might have to raid the one in my office. Hang on here. I can't copy. It won't work on 2021 because there was no, the balance sheet went back only two years.

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So I don't need to worry about 2021 there. Now going on though, just to keep this moving with these ratios, I did the liquidity ratios.

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Now the next thing I'm going to do here is I'm going to do the profitability ratios.

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And if I go here to my Excel spreadsheet, wait, oh I see. Downloads. Let me get that. There it is.

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Okay, there we go. Oh, will you shut it? Quit it. Stop it. Okay, good.

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Now let me go through here just briefly. You get to have this whenever you need it.

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And so we're just going to follow the formulas that are shown here on this.

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A lot of times I did liquidity first, but the sheet's doing profitability, showing profitability first. One more of that.

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Now one thing that I've got to watch out for here is that the first, I'm going to do gross, operating, and net margins.

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So I'm going to go over here. Gross margin, net operating margin, and net margin.

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A minor caution. I've done a lot of business. I've owned businesses and I did consulting for years.

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It's funny that this gross margin is used incorrectly quite a bit in the real world.

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When they say, well, the gross margin, they usually are referring to sales minus cost of goods sold.

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They're talking about the gross margin. And that's not what it is in ratios.

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And we use margin only for the ratio. And speaking of which, let me go over here. I'm going to show you something.

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I told you about how financial statements don't always have everything that you want them to have.

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Well, in this case, they don't have gross income, which we need.

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Well, where in the heck? Is there some reason why this sucks? Where did that go? Oh, there it is.

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It needs the gross profit, gross income. But it is not here on this company's income statement.

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And that's actually not unusual at all. A lot of companies don't report it.

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It used to be required, a mandatory line on the income statement.

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The only company I've seen recently, if I remember right, Target, had the gross income line.

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But a lot of companies don't even bother with it now. So I'm going to have to put it in here.

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I'm going to go and highlight row seven. And I'm going to right-click, insert.

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And I'm going to try right here, gross income. I mean, it's not hard to calculate.

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It's just your equal to your sales minus your cost of goods sold.

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There you go. And then I can drag it over a few lines. There you go.

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So I caution you, not just in this one, but in a lot of them, you might have to manually insert the gross income line.

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It's nothing terrible. It's just a little pain. And then I can do gross margin.

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Now if you look at the formula sheet, gross margin is gross profit or gross income over sales.

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Profit and income are two words for the same thing. So I will say equals, and I'll go over here to the income statement,

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gross income, row cell B7 over total sales, cell B4.

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Now try to remember to call out what cells I'm doing because if you're listening to the podcast,

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that's going to make it easier for you to know where I am.

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Okay, so we got gross margin. Now the next one we want is operating margin,

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which would be equal to, that is operating income. Well, this company doesn't call it operating income.

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They call it earnings before interest in taxes, EVIT.

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So we'll just put in equals in the income statement cell B17 divided by cell B4.

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And then finally, net margin equals your net income, your net earnings, whatever you want to call it,

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equals, now we got to go down here and find that stupid thing, there it is, cell B27 divided by cell B4.

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Now these are percentages. So I'm going to change these to percentages now before I copy them over.

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Percentages, now house rules. Every company has how many decimal places it wants.

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For our purposes, usually two is enough, especially for percentages. For factors, maybe four.

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But I'm going to fix these now so that when I copy them over, I said when I copy them over,

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yep, this mouse is about had it. Control C, Control V.

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Okay, calm, yeah. For which one, for net? For the net margin? Okay, that would be equals,

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now I'm going to go back over here to the consolidated income statement and I'm going to go down to cell B27, net earnings.

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And I'm going to divide that slash by total sales, B4. Got it? Good.

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Now, let me go back and explain myself. Gross margin, see that 12.46%?

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That's telling you that of every dollar in sales, only 12.5 cents survived the wholesale costs.

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That's what that's telling you. That's what gross margin just says in a nutshell.

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Notice how that has collapsed from two years previous, when it was about 28.3 cents of every dollar.

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It's now crashed down to 12.5 cents, less than half.

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So in other words, as I had mentioned last Wednesday, their wholesale costs are eating them alive.

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Their wholesale costs are going up faster than sales.

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Now here's the thing, the first, the easy question, well not an easy question.

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Let's try this. Madam, why would a company let wholesale costs go through the roof without the sales keeping up?

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Why isn't U.S. Steel just passing its wholesale costs along to its customers?

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That would keep gross margin from collapsing. You just pass along your costs, your wholesale costs are going up.

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Well, you just pass that along to your customers. Why isn't this company doing that?

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It's not easy to answer. I'm just looking for a genius. What did you say? Keep the customer happy.

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Well, you know, I like to have my customers happy, but I like it if I'm rich, more.

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If you're sad and I'm sad, that's great. But if you're sad and I'm happy, that's better.

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Here's the thing, it's competition. That's a problem.

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In an industry where there's competitive pressure, you can't just pass along your costs.

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And steel is a global competitive environment. You've got countries all over the world cranking out steel.

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And so you can't just, our costs went up, we'll just jack that along to the customers. You can't do that.

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It doesn't work. You can bring up your price a little bit, but you can't pass everything along.

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Not if your competitors aren't. They'll just walk right away from you.

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This is the same thing that happens in retail, in grocery stores. You say, well, these prices have just gone through the roof.

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And of course, obviously, they're passing along their costs.

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But they are not passing along hardly any of their costs compared to what they're eating.

178
00:29:56,000 --> 00:30:01,000
US Steel is eating its rising wholesale costs.

179
00:30:01,000 --> 00:30:05,000
Even these stores where you see the prices of the groceries going up,

180
00:30:05,000 --> 00:30:12,000
you would not believe how much they would have gone up if all those companies had just passed along their costs.

181
00:30:12,000 --> 00:30:20,000
You see, unless you're a monopoly or an oligopoly, you can't pass along your costs, all of them,

182
00:30:20,000 --> 00:30:26,000
because you've got competitors who are just going to say, we won't and we'll take your business.

183
00:30:26,000 --> 00:30:33,000
And so that's what's happening with US Steel. It's got wholesale costs that it can't pass along, at least not all of them,

184
00:30:33,000 --> 00:30:38,000
because it is in a fiercely competitive industry.

185
00:30:38,000 --> 00:30:45,000
So that's what you're seeing here. And hence, your gross margin is going to erode.

186
00:30:45,000 --> 00:30:53,000
And in this case, they are taking a butt bath on eating their rising wholesale costs.

187
00:30:53,000 --> 00:31:00,000
Operating margin. It's heading down even worse.

188
00:31:00,000 --> 00:31:11,000
Well, operating margin, well, that would mean that their costs aren't going, they are not cutting costs against gross margin.

189
00:31:11,000 --> 00:31:13,000
They should be cutting their costs.

190
00:31:13,000 --> 00:31:20,000
Well, there's only so much you can cut your costs before you cut into the meat and bleed to death.

191
00:31:20,000 --> 00:31:24,000
A whole lot of companies think they can just lay off, lay off, lay off.

192
00:31:24,000 --> 00:31:27,000
Well, you can't do that in some industries.

193
00:31:27,000 --> 00:31:32,000
One, the Steelworkers Union wouldn't be letting you do that.

194
00:31:32,000 --> 00:31:40,000
Two is, even if you were laying off people, there's only so many times you can do that before you run out of people to lay off.

195
00:31:40,000 --> 00:31:46,000
You're cutting into your experience. You're cutting into the morale and all of that.

196
00:31:46,000 --> 00:31:49,000
So there's US Steel is getting killed on wholesale costs.

197
00:31:49,000 --> 00:31:58,000
It's getting killed because it can't cut operating costs fast enough, and so net margin eats it.

198
00:31:58,000 --> 00:32:01,000
Fortunately, it's kind of unusual.

199
00:32:01,000 --> 00:32:09,000
You don't usually see net margin higher than operating margin, but it looked to me like a couple of things were going on.

200
00:32:09,000 --> 00:32:18,000
They were getting some non-operating income, it looks like, that boosted their net margin.

201
00:32:18,000 --> 00:32:21,000
And possibly there were some tax breaks.

202
00:32:21,000 --> 00:32:29,000
Let me look real quick here, see what was going on with their tax burden.

203
00:32:29,000 --> 00:32:32,000
Yeah, look at that. See that?

204
00:32:32,000 --> 00:32:36,000
They got some tax cuts. They benefit.

205
00:32:36,000 --> 00:32:41,000
See how their taxes are much lower in 2023 than they were in 2022?

206
00:32:41,000 --> 00:32:46,000
That's why the after-tax net margin rose a little bit.

207
00:32:46,000 --> 00:32:48,000
That was it right there.

208
00:32:48,000 --> 00:32:55,000
They got some benefits of some tax breaks or something.

209
00:32:55,000 --> 00:32:57,000
And I certainly won't begrudge them that.

210
00:32:57,000 --> 00:33:05,000
Okay, now there are two more profitability ratios that we need to look at.

211
00:33:05,000 --> 00:33:17,000
The first one is return on assets and then return on equity.

212
00:33:17,000 --> 00:33:22,000
ROA and ROE.

213
00:33:22,000 --> 00:33:26,000
Now, return on assets.

214
00:33:26,000 --> 00:33:39,000
Looking at the formula sheet, return on equity, return on assets.

215
00:33:39,000 --> 00:33:42,000
Net income over total assets.

216
00:33:42,000 --> 00:33:54,000
This is, you are in a, forget the term, metaphorical sense, treating your total assets,

217
00:33:54,000 --> 00:34:02,000
everything the company has, as if it is a single investment.

218
00:34:02,000 --> 00:34:10,000
And net income is how much you made off that ginormous investment.

219
00:34:10,000 --> 00:34:14,000
So this is like the return on your bank account.

220
00:34:14,000 --> 00:34:19,000
You put everything in there and see how much you make on it.

221
00:34:19,000 --> 00:34:23,000
So net income over your total assets.

222
00:34:23,000 --> 00:34:32,000
Equals, now we're going to go over here to the consolidated net income

223
00:34:32,000 --> 00:34:39,000
in the income statement B, cell B27, divided by,

224
00:34:39,000 --> 00:34:52,000
now I'm going to the balance sheet and grab the total assets, cell B15.

225
00:34:52,000 --> 00:34:56,000
Now that's a percentage.

226
00:34:56,000 --> 00:35:00,000
Now the next one is return on equity.

227
00:35:00,000 --> 00:35:06,000
If I look at the sheet, ROE.

228
00:35:06,000 --> 00:35:11,000
It's net income divided by common stockholders' equity.

229
00:35:11,000 --> 00:35:16,000
Now, if total assets is liabilities plus owners' equity,

230
00:35:16,000 --> 00:35:23,000
then this number, return on equity, has to be larger than return on assets.

231
00:35:23,000 --> 00:35:29,000
Because return on assets takes all of the assets as a denominator.

232
00:35:29,000 --> 00:35:33,000
Return on equity takes only the owners' equity as a denominator.

233
00:35:33,000 --> 00:35:36,000
So the return on equity has a smaller denominator,

234
00:35:36,000 --> 00:35:42,000
and therefore mathematically, arithmetically, it will be a larger number.

235
00:35:42,000 --> 00:35:50,000
So we're going to take net income divided by total shareholders' equity.

236
00:35:50,000 --> 00:36:01,000
So we say in the calculation sheet, cell B25 equals, I'll take,

237
00:36:01,000 --> 00:36:07,000
I've got to go over here to the income statement, net income, net earnings,

238
00:36:07,000 --> 00:36:15,000
cell B27 divided by, now going over here to the balance sheet,

239
00:36:15,000 --> 00:36:19,000
we've got to go find total shareholders' equity.

240
00:36:19,000 --> 00:36:23,000
Where the heck is it?

241
00:36:23,000 --> 00:36:26,000
Where? Oh, there it is.

242
00:36:26,000 --> 00:36:31,000
Total United States Steel Corporation stockholders' equity.

243
00:36:31,000 --> 00:36:41,000
36, yes. Yep, and you see it's a little larger.

244
00:36:41,000 --> 00:36:43,000
Twice as large as the fact.

245
00:36:43,000 --> 00:36:49,000
Now I'm going to turn both of those, highlight those two returns,

246
00:36:49,000 --> 00:36:55,000
and I'm going to turn them into percentages to two decimal places.

247
00:36:55,000 --> 00:37:06,000
So for 2023, ROA was 4.38 percent, and ROE was 8.10 percent.

248
00:37:06,000 --> 00:37:13,000
And then I'll copy those over to the year previous.

249
00:37:13,000 --> 00:37:15,000
What a disaster.

250
00:37:15,000 --> 00:37:22,000
Both of those have fallen to about a third of what they were.

251
00:37:22,000 --> 00:37:26,000
You see a catastrophe here almost.

252
00:37:26,000 --> 00:37:33,000
It's not the end of the company, but boy, they've taken a hit in 2023.

253
00:37:33,000 --> 00:37:37,000
And this is not, well, this is the lockdown.

254
00:37:37,000 --> 00:37:41,000
No, we were done with the lockdown in 2023.

255
00:37:41,000 --> 00:37:45,000
This is business operations.

256
00:37:45,000 --> 00:37:49,000
Bit the bullet on this one.

257
00:37:49,000 --> 00:37:50,000
Wow.

258
00:37:50,000 --> 00:37:54,000
Okay, let me come over here.

259
00:37:54,000 --> 00:37:57,000
Current ratio, okay.

260
00:37:57,000 --> 00:37:59,000
Liquidity, no, I did that.

261
00:37:59,000 --> 00:38:02,000
Oh, debt, yes, debt, absolutely.

262
00:38:02,000 --> 00:38:06,000
The debt ratios.

263
00:38:06,000 --> 00:38:18,000
The first one is debt to total assets.

264
00:38:18,000 --> 00:38:31,000
And the second one is times interest earned.

265
00:38:31,000 --> 00:38:35,000
Now, see that first one, debt to total assets?

266
00:38:35,000 --> 00:38:39,000
We have a couple of other names for that.

267
00:38:39,000 --> 00:38:43,000
One name for it is capital structure.

268
00:38:43,000 --> 00:38:46,000
The capital structure of the company is,

269
00:38:46,000 --> 00:38:49,000
and that's the percent of debt and the percent of equity.

270
00:38:49,000 --> 00:38:55,000
Now, the other thing is that we don't take total liabilities.

271
00:38:55,000 --> 00:39:02,000
All we look at for the debt to total assets is their long-term debt.

272
00:39:02,000 --> 00:39:04,000
So let me show you.

273
00:39:04,000 --> 00:39:08,000
Going to, in the calculations, cell B28.

274
00:39:08,000 --> 00:39:13,000
I'm going to take equals, and I'm going to the balance sheet,

275
00:39:13,000 --> 00:39:20,000
and I'm going to find long-term debt.

276
00:39:20,000 --> 00:39:25,000
Cell B24.

277
00:39:25,000 --> 00:39:29,000
Use just long-term debt for this.

278
00:39:29,000 --> 00:39:34,000
I mean, in a purest world, we take all the liabilities,

279
00:39:34,000 --> 00:39:42,000
but the debt is the 800-pound gorilla.

280
00:39:42,000 --> 00:39:52,000
Divided by total assets, which would be up above cell B15.

281
00:39:52,000 --> 00:39:54,000
Now, this is a percentage.

282
00:39:54,000 --> 00:40:03,000
So I'm going to, here, make it a percentage and make it two decimal places.

283
00:40:03,000 --> 00:40:07,000
Say that again.

284
00:40:07,000 --> 00:40:09,000
Do it again. Watch.

285
00:40:09,000 --> 00:40:12,000
I'm going to do equals by all means. Ask me to do it again.

286
00:40:12,000 --> 00:40:14,000
That's great.

287
00:40:14,000 --> 00:40:21,000
Equals, I'm going to take only the long-term debt,

288
00:40:21,000 --> 00:40:27,000
and this can be a real maze finding what you want in this briar bush.

289
00:40:27,000 --> 00:40:34,000
It's right here, cell B24.

290
00:40:34,000 --> 00:40:48,000
And then I'm going to divide it by total assets, cell B15.

291
00:40:48,000 --> 00:40:50,000
19.95%.

292
00:40:50,000 --> 00:40:56,000
So put in a little bit fancy terms,

293
00:40:56,000 --> 00:41:05,000
the capital structure of U.S. Steel is 20% debt.

294
00:41:05,000 --> 00:41:09,000
Now, technically what I'm about to say isn't correct,

295
00:41:09,000 --> 00:41:15,000
but the capital structure is 20% debt, 80% equity.

296
00:41:15,000 --> 00:41:19,000
That's not exactly right because we didn't take into account some other liabilities.

297
00:41:19,000 --> 00:41:24,000
But this is a rough measure of it.

298
00:41:24,000 --> 00:41:35,000
This company's total assets are made up of 20% debt.

299
00:41:35,000 --> 00:41:45,000
So they've financed their total assets to the tune of about 20% with debt.

300
00:41:45,000 --> 00:41:47,000
Now, is that good or bad?

301
00:41:47,000 --> 00:41:50,000
We'll talk about that in a minute.

302
00:41:50,000 --> 00:41:59,000
Remember, that number by company can be all over the place, 5%, 10%, 80%.

303
00:41:59,000 --> 00:42:08,000
I mean, there are even these companies called LBOs that are 100% debt.

304
00:42:08,000 --> 00:42:12,000
There is no equity, but I won't get into that.

305
00:42:12,000 --> 00:42:14,000
Now, times interest earned.

306
00:42:14,000 --> 00:42:17,000
Look at the formula.

307
00:42:17,000 --> 00:42:21,000
It says earnings before interest in taxes, operating income,

308
00:42:21,000 --> 00:42:25,000
divided by interest expense.

309
00:42:25,000 --> 00:42:34,000
Now, look over here at the income statement.

310
00:42:34,000 --> 00:42:38,000
Look, here's the EBIT line, B-17.

311
00:42:38,000 --> 00:42:43,000
The very next line is their interest expense.

312
00:42:43,000 --> 00:42:51,000
So EBIT is how much money there is to pay the interest expense.

313
00:42:51,000 --> 00:43:01,000
So times interest earned, just takes the ratio of those, equals EBIT.

314
00:43:01,000 --> 00:43:02,000
Where the heck is it?

315
00:43:02,000 --> 00:43:03,000
There it is.

316
00:43:03,000 --> 00:43:12,000
So B-17 divided by so B-18, interest expense.

317
00:43:12,000 --> 00:43:22,000
And I'll make that two decimal places.

318
00:43:22,000 --> 00:43:24,000
Dang.

319
00:43:24,000 --> 00:43:26,000
So that's 11.10.

320
00:43:26,000 --> 00:43:32,000
What that's telling you is that the company has enough money right before it pays

321
00:43:32,000 --> 00:43:40,000
interest expense to pay its interest expense 11 times over.

322
00:43:40,000 --> 00:43:43,000
I'll say that again.

323
00:43:43,000 --> 00:43:52,000
11.10 for the times interest earned is saying that they have enough money right

324
00:43:52,000 --> 00:44:00,000
before they pay their interest to pay that interest 11 times over.

325
00:44:00,000 --> 00:44:04,000
Now, is that good or is that bad?

326
00:44:04,000 --> 00:44:07,000
First things first.

327
00:44:07,000 --> 00:44:12,000
There is a bad number.

328
00:44:12,000 --> 00:44:20,000
If earnings before interest and taxes were smaller than the interest expense,

329
00:44:20,000 --> 00:44:23,000
the company would be in default.

330
00:44:23,000 --> 00:44:26,000
It would not be able to pay its interest.

331
00:44:26,000 --> 00:44:32,000
And the bondholders would walk right in and try to liquidate the company.

332
00:44:32,000 --> 00:44:38,000
And all the company could do is run to bankruptcy court and file for Chapter 11 protection.

333
00:44:38,000 --> 00:44:42,000
So you really want to see that number above one.

334
00:44:42,000 --> 00:44:47,000
And it's really nice if that has some distance above one.

335
00:44:47,000 --> 00:44:56,000
Like for example, you have $120 and you owe $100 in interest.

336
00:44:56,000 --> 00:44:57,000
That's scary.

337
00:44:57,000 --> 00:45:00,000
That's a 1.2 times interest earned.

338
00:45:00,000 --> 00:45:08,000
But if you had $10,000 and you owe me $100, well, that's fine.

339
00:45:08,000 --> 00:45:09,000
You see that?

340
00:45:09,000 --> 00:45:11,000
Okay, good.

341
00:45:11,000 --> 00:45:13,000
So higher the better?

342
00:45:13,000 --> 00:45:16,000
No.

343
00:45:16,000 --> 00:45:18,000
It gets into something.

344
00:45:18,000 --> 00:45:22,000
I'm going to tell you another term here for this.

345
00:45:22,000 --> 00:45:29,000
On the calculation sheet, you see that debt to total assets of about 20%, 19.95%?

346
00:45:29,000 --> 00:45:34,000
That is sometimes called leverage.

347
00:45:34,000 --> 00:45:45,000
The problem is that a company that has too much money to pay its interest expense

348
00:45:45,000 --> 00:45:52,000
could borrow money, more money, and still pay its interest expense

349
00:45:52,000 --> 00:45:56,000
and use that money to invest in the company.

350
00:45:56,000 --> 00:46:01,000
Later in the course, I'm going to show you how you can become millionaires.

351
00:46:01,000 --> 00:46:03,000
And I'm not kidding.

352
00:46:03,000 --> 00:46:07,000
Madam, would you like to be a millionaire?

353
00:46:07,000 --> 00:46:08,000
Sure.

354
00:46:08,000 --> 00:46:09,000
Sure?

355
00:46:09,000 --> 00:46:10,000
No, not sure.

356
00:46:10,000 --> 00:46:12,000
Say yes, please.

357
00:46:12,000 --> 00:46:19,000
But actually, it all hinges on gains to leverage.

358
00:46:19,000 --> 00:46:25,000
You see, because if I, and I'll show you an example of this,

359
00:46:25,000 --> 00:46:30,000
how you can make a fortune in real estate over a period of maybe five years,

360
00:46:30,000 --> 00:46:31,000
which people do.

361
00:46:31,000 --> 00:46:34,000
They've been doing it for a long, long time.

362
00:46:34,000 --> 00:46:37,000
But unfortunately, sometimes they get caught on the downside.

363
00:46:37,000 --> 00:46:38,000
Think about it this way.

364
00:46:38,000 --> 00:46:48,000
I've got $100,000, and I'm going to buy a property that I'm pretty sure will go to $110,000.

365
00:46:48,000 --> 00:46:59,000
Well, okay, use all of my equity, $100,000, and come out with $110,000.

366
00:46:59,000 --> 00:47:02,000
I've made a 10% return.

367
00:47:02,000 --> 00:47:08,000
But what would happen if I were, instead of using $100,000,

368
00:47:08,000 --> 00:47:13,000
I used $10,000 of my own money for 10 properties,

369
00:47:13,000 --> 00:47:22,000
and then I borrowed $90,000 for each of those properties from a bank?

370
00:47:22,000 --> 00:47:26,000
Well, you see, when the property goes to $110,000,

371
00:47:26,000 --> 00:47:33,000
my loan will still, I'll owe back $900,000 plus the interest.

372
00:47:33,000 --> 00:47:37,000
The amount I owe back will not change.

373
00:47:37,000 --> 00:47:43,000
But all that extra that's over that, that's gravy to me.

374
00:47:43,000 --> 00:47:45,000
That's called gains to leverage.

375
00:47:45,000 --> 00:47:52,000
And that's how real estate geniuses make a very large amount of money

376
00:47:52,000 --> 00:47:57,000
in a relatively short number of years, is through that gains to leverage.

377
00:47:57,000 --> 00:48:10,000
And it all hinges on a three-letter designation, OPM.

378
00:48:10,000 --> 00:48:14,000
Madam, do you know what OPM stands for?

379
00:48:14,000 --> 00:48:19,000
You don't.

380
00:48:19,000 --> 00:48:22,000
Other People's Money.

381
00:48:22,000 --> 00:48:24,000
It's not even a joke, but it sounds like it.

382
00:48:24,000 --> 00:48:28,000
You see, if I use other people's money and I owe them back a fixed amount

383
00:48:28,000 --> 00:48:33,000
with interest, then if that thing goes way up in price,

384
00:48:33,000 --> 00:48:38,000
the gravy is all mine because they don't get any of that extra.

385
00:48:38,000 --> 00:48:42,000
I get it because I was the equity investor.

386
00:48:42,000 --> 00:48:46,000
That's how we played it in a lot of different games in real estate,

387
00:48:46,000 --> 00:48:50,000
and all those different things.

388
00:48:50,000 --> 00:48:55,000
Even back a long, long time ago when I was involved in Indie Movie,

389
00:48:55,000 --> 00:48:59,000
bringing the money together, we would use OPM.

390
00:48:59,000 --> 00:49:05,000
Very little of our own money, but then if we could book,

391
00:49:05,000 --> 00:49:10,000
I mean, it didn't ever go to theaters, we just went to VHS and beta tapes.

392
00:49:10,000 --> 00:49:15,000
And then all that extra money we made over the cost of the production,

393
00:49:15,000 --> 00:49:20,000
we paid back those people who had a fixed obligation to them,

394
00:49:20,000 --> 00:49:24,000
and then all the rest of it we got to keep for ourselves.

395
00:49:24,000 --> 00:49:27,000
It's done in all kinds of different industries.

396
00:49:27,000 --> 00:49:32,000
You just have to find compliant banks who will play the game with you.

397
00:49:32,000 --> 00:49:37,000
And that takes a lot of negotiating and some bullying, but it's doable.

398
00:49:37,000 --> 00:49:40,000
And that's what's going on here.

399
00:49:40,000 --> 00:49:48,000
You've got a company that had its sales go down, for God's sake.

400
00:49:48,000 --> 00:49:53,000
Its sales went down because it's having a hard time with the competition.

401
00:49:53,000 --> 00:49:57,000
They can beat its ass on technology, new technology for steelmaking,

402
00:49:57,000 --> 00:50:01,000
for distribution, for the whole nine yards, for extraction.

403
00:50:01,000 --> 00:50:12,000
So this is a company that could say, well, why don't we just borrow a lot more money?

404
00:50:12,000 --> 00:50:20,000
If you look here, they borrowed hardly any more money.

405
00:50:20,000 --> 00:50:22,000
And yet, what did they do?

406
00:50:22,000 --> 00:50:31,000
They increased their property, plant, and equipment by close to $2 billion.

407
00:50:31,000 --> 00:50:34,000
And they didn't do it with debt.

408
00:50:34,000 --> 00:50:40,000
And so the equity holders are going to get nothing really out of that.

409
00:50:40,000 --> 00:50:44,000
That is a great failure of this company.

410
00:50:44,000 --> 00:50:48,000
It's just not using OPM.

411
00:50:48,000 --> 00:50:56,000
And so in a very real sense, they're violating their fiduciary duty to their shareholders

412
00:50:56,000 --> 00:51:00,000
by not maximizing the wealth of the shareholders.

413
00:51:00,000 --> 00:51:08,000
And maximizing it in this case would be to get that debt to total assets up there a little higher.

414
00:51:08,000 --> 00:51:12,000
They've got more than enough money to pay their interest.

415
00:51:12,000 --> 00:51:16,000
So a little more interest is not going to kill them, not at all.

416
00:51:16,000 --> 00:51:20,000
Typically, where do you see that times interest earned, like I said, it can be all over the place.

417
00:51:20,000 --> 00:51:24,000
You get a little sweaty when it gets too close to one.

418
00:51:24,000 --> 00:51:31,000
I see them a lot in the range of about six up to 12.

419
00:51:31,000 --> 00:51:40,000
But, God, there are some companies that have times interest earned like 20, 25 times over.

420
00:51:40,000 --> 00:51:48,000
They're just not using that capital structure to its maximum advantage to their shareholders.

421
00:51:48,000 --> 00:51:53,000
Now granted, over the past few years, interest rates have been damn high.

422
00:51:53,000 --> 00:52:00,000
And a lot of companies have been holding back on long-term debt, waiting for interest rates to go down.

423
00:52:00,000 --> 00:52:03,000
So there is that. I'll grant them that.

424
00:52:03,000 --> 00:52:06,000
But anyway, there's a lesson from that.

425
00:52:06,000 --> 00:52:12,000
And as I'm going along, what I'm trying to show you is that the numbers are just the beginning.

426
00:52:12,000 --> 00:52:22,000
You can have... This morning, I was driving here and I got an AI that I can ask questions to.

427
00:52:22,000 --> 00:52:26,000
And I was asking it for the ratios of U.S. Steel.

428
00:52:26,000 --> 00:52:28,000
And it was spinning them out at me.

429
00:52:28,000 --> 00:52:33,000
Of course, I was trying to remember them and not have a car accident at the same time.

430
00:52:33,000 --> 00:52:37,000
But at the same... I mean, this can be done.

431
00:52:37,000 --> 00:52:44,000
The analysis, the think, what if, why, what else?

432
00:52:44,000 --> 00:52:49,000
That's where we can come to the front as humans.

433
00:52:49,000 --> 00:52:55,000
I have a chat GPT that I built for financial analysis.

434
00:52:55,000 --> 00:53:01,000
It's not bad, but it doesn't have that human insight.

435
00:53:01,000 --> 00:53:03,000
It just doesn't have it.

436
00:53:03,000 --> 00:53:06,000
And it probably will in a few years, but not right now.

437
00:53:06,000 --> 00:53:10,000
So you've got an advantage if you can just start to ask these kinds of questions.

438
00:53:10,000 --> 00:53:15,000
Now let me go over here to the asset activity.

439
00:53:21,000 --> 00:53:26,000
Now the first one, average collection period.

440
00:53:26,000 --> 00:53:32,000
I'm not going to do it, and I have a very good reason why.

441
00:53:32,000 --> 00:53:35,000
That reason is because I'm lazy.

442
00:53:35,000 --> 00:53:47,000
If you look at the formula, the average collection period in the denominator is average daily credit sales,

443
00:53:47,000 --> 00:53:56,000
which would be total credit sales for the year divided by 360 days.

444
00:53:56,000 --> 00:54:03,000
The problem is that finding credit sales used to be easy, now it's not.

445
00:54:03,000 --> 00:54:10,000
You can use a statement of cash flows to dig it out,

446
00:54:10,000 --> 00:54:14,000
but directly you'd have to go to the notes of the financial statement

447
00:54:14,000 --> 00:54:22,000
or to that 10K I showed you and go down to the MD&A and find it there.

448
00:54:22,000 --> 00:54:29,000
It's not an easy one to find, and I'm not in the mood to have you find it

449
00:54:29,000 --> 00:54:33,000
because I don't care to go searching for it.

450
00:54:33,000 --> 00:54:35,000
So we leave that one out.

451
00:54:35,000 --> 00:54:39,000
You take a higher level course from me, sure we'll have that.

452
00:54:39,000 --> 00:54:42,000
Sure we'll do that, but not today.

453
00:54:42,000 --> 00:54:46,000
Now the next two, especially the next one,

454
00:54:46,000 --> 00:54:59,000
the other two in asset activity are inventory turnover and total asset turnover.

455
00:54:59,000 --> 00:55:10,000
Inventory turnover.

456
00:55:10,000 --> 00:55:14,000
It's sales divided by inventory.

457
00:55:14,000 --> 00:55:25,000
You take your equals, go over here to the income statement,

458
00:55:25,000 --> 00:55:39,000
sell B4 divided by, go to the balance sheet, find the inventory, sell B4,

459
00:55:39,000 --> 00:55:42,000
and there you go.

460
00:55:42,000 --> 00:55:48,000
There's your inventory turnover, 8.49 times.

461
00:55:48,000 --> 00:55:58,000
What that tells you is that this company cleared its warehouses

462
00:55:58,000 --> 00:56:09,000
about 8.5 times last year and then refilled them.

463
00:56:09,000 --> 00:56:13,000
I mean if you were to count, well that one's been here for like 8 months,

464
00:56:13,000 --> 00:56:19,000
no it's overall, overall, it wiped out its inventory

465
00:56:19,000 --> 00:56:24,000
and put in new inventory 8.5 times, about every month and a half,

466
00:56:24,000 --> 00:56:26,000
about every month and a half.

467
00:56:26,000 --> 00:56:31,000
It cleared everything it had and got new in.

468
00:56:31,000 --> 00:56:37,000
Now the total asset turnover goes back to something I said earlier.

469
00:56:37,000 --> 00:56:45,000
If you were to take the entire company and see how many times you sold

470
00:56:45,000 --> 00:56:51,000
the whole company and respond it.

471
00:56:51,000 --> 00:56:57,000
So I'll take equals, sales, again sell B4 in the income statement,

472
00:56:57,000 --> 00:57:03,000
this time divided by the whole asset, the entire company,

473
00:57:03,000 --> 00:57:13,000
total assets, sell B15 in the balance sheet, there you go, 0.88.

474
00:57:13,000 --> 00:57:19,000
So I'm going to make those, oh I'll make them two decimal places

475
00:57:19,000 --> 00:57:27,000
and then copy it over, one period.

476
00:57:27,000 --> 00:57:35,000
Now going back, going back, look at inventory turnover.

477
00:57:35,000 --> 00:57:40,000
And I've already talked about this so this is sort of a review,

478
00:57:40,000 --> 00:57:43,000
a little more intensive.

479
00:57:43,000 --> 00:57:53,000
A huge thing since the 1990s was to increase that inventory turnover ratio,

480
00:57:53,000 --> 00:57:59,000
to get the inventory in and out, in and out, as fast as you can.

481
00:57:59,000 --> 00:58:02,000
That saves you warehouse space.

482
00:58:02,000 --> 00:58:07,000
Instead of holding inventory that will last six months,

483
00:58:07,000 --> 00:58:11,000
you hold inventory that will last you one month.

484
00:58:11,000 --> 00:58:16,000
That saves inventory warehouse space, the opportunity cost of that space,

485
00:58:16,000 --> 00:58:22,000
the lights, the security, all of that.

486
00:58:22,000 --> 00:58:27,000
So if you get everything in and out faster, since the 1990s,

487
00:58:27,000 --> 00:58:34,000
because the Japanese have a system for, at least in some of their companies,

488
00:58:34,000 --> 00:58:38,000
some of their industries, where they have no inventory.

489
00:58:38,000 --> 00:58:43,000
When they need something, they just have the supplier deliver it to the factory floor.

490
00:58:43,000 --> 00:58:45,000
No inventory.

491
00:58:45,000 --> 00:58:51,000
So in other words, inventory is zero, so sales over inventory is infinity.

492
00:58:51,000 --> 00:58:53,000
Well, we can't do that.

493
00:58:53,000 --> 00:58:56,000
We tried and it didn't work out too well.

494
00:58:56,000 --> 00:59:00,000
But that just-in-time system, as we call it.

495
00:59:00,000 --> 00:59:08,000
But we have been obsessed with increasing inventory turnover ratio.

496
00:59:08,000 --> 00:59:11,000
It started at four.

497
00:59:11,000 --> 00:59:19,000
We increase our turnover speed so that we have eight times a year

498
00:59:19,000 --> 00:59:20,000
we turn over the inventory.

499
00:59:20,000 --> 00:59:22,000
Well, let's keep cranking it.

500
00:59:22,000 --> 00:59:25,000
Sixteen times over, we turn the inventory over.

501
00:59:25,000 --> 00:59:28,000
That means less and less inventory at any given time

502
00:59:28,000 --> 00:59:32,000
and a higher and higher inventory turnover ratio.

503
00:59:32,000 --> 00:59:37,000
That was wonderful until the supply chain broke.

504
00:59:37,000 --> 00:59:41,000
And suddenly, you had wiped out all of your toilet paper on the shelves,

505
00:59:41,000 --> 00:59:45,000
all of your bread on the shelves, all of your salted snacks on the shelves,

506
00:59:45,000 --> 00:59:53,000
all of your pharmaceutical lightweight stuff like alcohol, hydrogen peroxide, toothpaste.

507
00:59:53,000 --> 00:59:55,000
All of a sudden, you sold them all.

508
00:59:55,000 --> 00:59:58,000
By golly, you got them out of that inventory and sold them.

509
00:59:58,000 --> 01:00:00,000
Now let's order more inventory.

510
01:00:00,000 --> 01:00:01,000
Wait, what? Where's the inventory?

511
01:00:01,000 --> 01:00:04,000
You say you can't get it to us. Why can't you?

512
01:00:04,000 --> 01:00:08,000
Oh, because your suppliers can't get it to you, so you can't get it to us.

513
01:00:08,000 --> 01:00:12,000
As soon as the supply chain started to break down, it just collapsed.

514
01:00:12,000 --> 01:00:16,000
That's why store shelves were empty during the lockdown.

515
01:00:16,000 --> 01:00:19,000
And they haven't even recovered yet.

516
01:00:19,000 --> 01:00:24,000
Don't let any of these geniuses tell you,

517
01:00:24,000 --> 01:00:27,000
well, it was a complex thing with a lot of different global factors.

518
01:00:27,000 --> 01:00:33,000
Bullshit. It was just that we had been pushing it, pushing it, pushing it, until finally,

519
01:00:33,000 --> 01:00:40,000
you, sir, I want you to get two assignments done every night.

520
01:00:40,000 --> 01:00:43,000
Well, I mean, I'm going to increase that to four.

521
01:00:43,000 --> 01:00:45,000
And then, oh, fine, okay, let's get it to eight.

522
01:00:45,000 --> 01:00:47,000
You can push yourself harder and harder.

523
01:00:47,000 --> 01:00:50,000
Well, you know what finally happens?

524
01:00:50,000 --> 01:00:55,000
You say FTS before my head explodes.

525
01:00:55,000 --> 01:00:59,000
You can do it only for so long.

526
01:00:59,000 --> 01:01:02,000
It all happened one night when you couldn't do the homework

527
01:01:02,000 --> 01:01:04,000
because you'd eaten a Taco Bell,

528
01:01:04,000 --> 01:01:09,000
and you couldn't take your homework into the bathroom with you.

529
01:01:09,000 --> 01:01:11,000
I understand. I'm with you there.

530
01:01:11,000 --> 01:01:13,000
Don't send that to me as an excuse in your email.

531
01:01:13,000 --> 01:01:19,000
Seriously, dude, I've had enough appalling explanations said to me over the years.

532
01:01:19,000 --> 01:01:24,000
I don't... anyway.

533
01:01:24,000 --> 01:01:32,000
That last one was just too much information, too much sharing.

534
01:01:32,000 --> 01:01:34,000
Here we go.

535
01:01:34,000 --> 01:01:38,000
Well, this US Steel actually is going the wrong way, though.

536
01:01:38,000 --> 01:01:43,000
You do want your inventory turnover ratio to be robust.

537
01:01:43,000 --> 01:01:45,000
Now, there is a limit to that.

538
01:01:45,000 --> 01:01:49,000
As I said, you've got to have inventory buffer.

539
01:01:49,000 --> 01:01:55,000
That was the thing that was lacking in this speed up the inventory turnover ratio.

540
01:01:55,000 --> 01:02:00,000
You were leaving yourself completely without a buffer.

541
01:02:00,000 --> 01:02:04,000
So we don't want it to go too high, but US Steel is going the wrong way.

542
01:02:04,000 --> 01:02:09,000
Do you see how it actually dropped a little bit? It wasn't significant, but it did drop.

543
01:02:09,000 --> 01:02:12,000
Now, look at the next one.

544
01:02:12,000 --> 01:02:23,000
That's worrisome because we're saying how many times over did this company sell itself and then respawn?

545
01:02:23,000 --> 01:02:31,000
And that's a low number. It's not terribly low, but it dropped noticeably.

546
01:02:31,000 --> 01:02:36,000
Fortunately, there's a good explanation for why it dropped.

547
01:02:36,000 --> 01:02:41,000
I showed it to you just a minute ago. Look at this. Look on the balance sheet.

548
01:02:41,000 --> 01:02:47,000
Look at the property plant and equipment from 2022 to 2023.

549
01:02:47,000 --> 01:02:50,000
It went up by almost $2 billion.

550
01:02:50,000 --> 01:02:57,000
So that's a lot more to turn over.

551
01:02:57,000 --> 01:03:09,000
It would be like, madam, you are a total asset.

552
01:03:09,000 --> 01:03:20,000
Last year, I turned you into a slurpee and I sold you.

553
01:03:20,000 --> 01:03:35,000
Well, since that time, you have gained a lot of weight.

554
01:03:35,000 --> 01:03:41,000
About 25%. Easy.

555
01:03:41,000 --> 01:03:46,000
I don't want to live forever, but I want to live past this class.

556
01:03:46,000 --> 01:03:50,000
Now, I turned you into a bigger slurpee.

557
01:03:50,000 --> 01:03:54,000
It's going to be harder for me to turn you over, to sell you.

558
01:03:54,000 --> 01:04:00,000
All in one giant slurpee you get when you go to the movies.

559
01:04:00,000 --> 01:04:02,000
It's like five gallons.

560
01:04:02,000 --> 01:04:07,000
You are more, so it's going to be harder to turn over the totality of you.

561
01:04:07,000 --> 01:04:09,000
That's what happened here in the US Steel's case.

562
01:04:09,000 --> 01:04:15,000
That's why their total asset turnover ratio went down so noticeably.

563
01:04:15,000 --> 01:04:23,000
It was because they put in $2 billion worth of more assets than they had before.

564
01:04:23,000 --> 01:04:29,000
Now, my criticism there still is, stands, you did that with equity and retained earnings.

565
01:04:29,000 --> 01:04:33,000
You did not do that with debt, which is what you should have done.

566
01:04:33,000 --> 01:04:42,000
Because your time's interest earned could have sustained a lot more interest payments than it has right now.

567
01:04:42,000 --> 01:04:50,000
But nevertheless, that inventory turnover ratio, that asset turnover ratio, did fall, but there's a good reason.

568
01:04:50,000 --> 01:04:56,000
Just a lot more assets this year than last.

569
01:04:56,000 --> 01:05:00,000
Okay, good.

570
01:05:00,000 --> 01:05:01,000
Okay, I've got debt.

571
01:05:01,000 --> 01:05:03,000
Okay, now.

572
01:05:03,000 --> 01:05:04,000
Market.

573
01:05:04,000 --> 01:05:12,000
Now, the first of these is the price to earnings.

574
01:05:12,000 --> 01:05:19,000
And I will tell you right now that I would not ask you to do it like a ratio.

575
01:05:19,000 --> 01:05:22,000
You go and find it on some financial service.

576
01:05:22,000 --> 01:05:25,000
They all report P-E ratio.

577
01:05:25,000 --> 01:05:32,000
Technically, the P-E ratio is the price per share divided by the earnings per share.

578
01:05:32,000 --> 01:05:40,000
Well, the problem with doing that as a ratio is that I would be picking the price off that's bouncing,

579
01:05:40,000 --> 01:05:44,000
boing, boing, boing, boing, boing, boing, all over the place day to day.

580
01:05:44,000 --> 01:05:45,000
The market.

581
01:05:45,000 --> 01:05:47,000
You see how those numbers change all the time.

582
01:05:47,000 --> 01:05:53,000
And the earnings, well, you'd have to chase back to some historical number from the financial statements.

583
01:05:53,000 --> 01:05:58,000
So you'd have a market against a financial, and that market is so volatile from one.

584
01:05:58,000 --> 01:06:01,000
Hell, you saw one today that went up by over 600%.

585
01:06:01,000 --> 01:06:05,000
So it's not going to be a good idea to do that one.

586
01:06:05,000 --> 01:06:07,000
Just go and get a service.

587
01:06:07,000 --> 01:06:14,000
I mean, I'm sure the book gives you a homework problem where they give you the price, give you the earnings, and all that.

588
01:06:14,000 --> 01:06:15,000
Don't do that.

589
01:06:15,000 --> 01:06:19,000
The next one, however, is important.

590
01:06:19,000 --> 01:06:30,000
Market to book.

591
01:06:30,000 --> 01:06:38,000
Your textbook earlier, I think it was chapter three, they said that there is this number,

592
01:06:38,000 --> 01:06:42,000
takes the market value of the company minus the book value of the company.

593
01:06:42,000 --> 01:06:49,000
That's a terrible way to do it simply because you'd be looking at billion dollar companies

594
01:06:49,000 --> 01:06:52,000
and trying to compare those to million dollar companies.

595
01:06:52,000 --> 01:06:59,000
So the market to book difference, market minus book would be, I mean, you couldn't do any comparison.

596
01:06:59,000 --> 01:07:07,000
Market to book, however, takes the market value of the company.

597
01:07:07,000 --> 01:07:08,000
That's the market cap.

598
01:07:08,000 --> 01:07:12,000
It's right there for you on any service and divided by the book value.

599
01:07:12,000 --> 01:07:14,000
That's the total shareholder's equity.

600
01:07:14,000 --> 01:07:20,000
Now, let me explain why this is a very useful thing for you.

601
01:07:20,000 --> 01:07:24,000
Looking around here, I've got to find someone I haven't bothered for a long time.

602
01:07:24,000 --> 01:07:27,000
Someone who looks youthful, I haven't bothered you.

603
01:07:27,000 --> 01:07:30,000
That's right, you.

604
01:07:30,000 --> 01:07:33,000
The intellectual with the glasses and all that.

605
01:07:33,000 --> 01:07:34,000
Okay, here.

606
01:07:34,000 --> 01:07:37,000
You are my son.

607
01:07:37,000 --> 01:07:39,000
It wasn't my fault.

608
01:07:39,000 --> 01:07:45,000
Look, it was Decatur and truck stop.

609
01:07:45,000 --> 01:07:51,000
But anyway.

610
01:07:51,000 --> 01:07:55,000
I get so much trouble for my Decatur jokes.

611
01:07:55,000 --> 01:07:58,000
Okay, listen.

612
01:07:58,000 --> 01:07:59,000
I raised you right.

613
01:07:59,000 --> 01:08:04,000
I spent a quarter of a million dollars to get you to the point where you were out on your own.

614
01:08:04,000 --> 01:08:06,000
A quarter of a million dollars.

615
01:08:06,000 --> 01:08:11,000
Now you're out there and the future is in front of you.

616
01:08:11,000 --> 01:08:15,000
Okay, let me calculate the net present value of the future expected cash flows, his earnings.

617
01:08:15,000 --> 01:08:24,000
And I've come out with a number that your value right at that point is five million dollars.

618
01:08:24,000 --> 01:08:27,000
The market to book therefore is 20.

619
01:08:27,000 --> 01:08:32,000
Five million is what I got out of an investment of 250,000.

620
01:08:32,000 --> 01:08:36,000
Now accounting numbers are historical, but this one is important.

621
01:08:36,000 --> 01:08:43,000
Because that book value, total shareholders' equity, that is measuring a real thing.

622
01:08:43,000 --> 01:08:51,000
See, when people buy the stock, they become that money is shareholders' equity.

623
01:08:51,000 --> 01:08:59,000
When a company earns money after pays all its bills and pays a dividend, the residual goes into retained earnings.

624
01:08:59,000 --> 01:09:12,000
So that total shareholders' equity is made up of actual money that belongs to the shareholders that was theirs and built up over the life of that company.

625
01:09:12,000 --> 01:09:15,000
That's the 250,000 dollars.

626
01:09:15,000 --> 01:09:22,000
The market price times the number of those shares outstanding is the market value of the company.

627
01:09:22,000 --> 01:09:25,000
That's how it works.

628
01:09:25,000 --> 01:09:34,000
So the accumulated, we got this money from stock and we also got this money for the shareholders from our operations.

629
01:09:34,000 --> 01:09:40,000
That's a whole nine yards of what the shareholders have sacrificed.

630
01:09:40,000 --> 01:09:53,000
The market value over here, let me take this, get over here to Yee-Haw Finance again and get U.S. Steel up.

631
01:09:53,000 --> 01:09:54,000
There it is.

632
01:09:54,000 --> 01:09:58,000
10.242 billion dollars.

633
01:09:58,000 --> 01:10:05,000
That is what the market says all of that money has created in value.

634
01:10:05,000 --> 01:10:15,000
That 10.242 billion dollars is the five million in my example with him.

635
01:10:15,000 --> 01:10:19,000
So if I took this number, and I'll have to, you've got to watch it.

636
01:10:19,000 --> 01:10:22,000
This is where I screw up so much.

637
01:10:22,000 --> 01:10:26,000
These numbers, let me go over here to the balance sheet.

638
01:10:26,000 --> 01:10:30,000
See the total shareholders' equity here?

639
01:10:30,000 --> 01:10:34,000
Right here, it's the 11,047.

640
01:10:34,000 --> 01:10:36,000
That's in millions.

641
01:10:36,000 --> 01:10:40,000
So that's 11,047 million.

642
01:10:40,000 --> 01:10:45,000
So you've got to watch it because usually Yee-Haw Finance gives things in billions.

643
01:10:45,000 --> 01:10:50,000
So I've got to write that top number, the market value, in millions.

644
01:10:50,000 --> 01:10:58,000
So what I'll do is I want to put it over here and I'm going to, I go over here to the, I'm going over here.

645
01:10:58,000 --> 01:11:05,000
I have to turn that into millions, so that would be 10,242 million.

646
01:11:05,000 --> 01:11:06,000
You've got to watch that.

647
01:11:06,000 --> 01:11:08,000
It's just one of those things.

648
01:11:08,000 --> 01:11:10,000
I won't make it so that that trips you up.

649
01:11:10,000 --> 01:11:24,000
But I'm going to say 10,242, try that again, equals 10,242, is there some reason this sucks?

650
01:11:24,000 --> 01:11:30,000
That equals 10,242 million.

651
01:11:30,000 --> 01:11:32,000
Why?

652
01:11:32,000 --> 01:11:34,000
You know what?

653
01:11:34,000 --> 01:11:42,000
Equals 10 million.

654
01:11:42,000 --> 01:11:49,000
Equals 10,242,000.

655
01:11:49,000 --> 01:12:00,000
And divide that by the total shareholders equity on the balance sheet, which is right here.

656
01:12:00,000 --> 01:12:04,000
This company sucks.

657
01:12:04,000 --> 01:12:07,000
This number should be 10, 20.

658
01:12:07,000 --> 01:12:15,000
In other words, what you were saying was that.927, which is about.93.

659
01:12:15,000 --> 01:12:26,000
U.S. Steel has actually devalued the total money put in by shareholders through investment in the stock

660
01:12:26,000 --> 01:12:32,000
or through giving up dividends and letting the company plow back profit.

661
01:12:32,000 --> 01:12:42,000
It was in the last year, let's try, dang.

662
01:12:42,000 --> 01:12:45,000
Really?

663
01:12:45,000 --> 01:12:46,000
Nope, not going to get it.

664
01:12:46,000 --> 01:12:48,000
It was about 1.01, I think.

665
01:12:48,000 --> 01:12:50,000
But one way or the other.

666
01:12:50,000 --> 01:12:54,000
This company, it's like putting $10,000 in the bank and the bank says,

667
01:12:54,000 --> 01:13:01,000
well, now we've got $9,300 of your money.

668
01:13:01,000 --> 01:13:02,000
That's a problem.

669
01:13:02,000 --> 01:13:06,000
U.S. Steel is in trouble.

670
01:13:06,000 --> 01:13:11,000
I will save this and it will be in your worksheets later this afternoon.

671
01:13:11,000 --> 01:13:13,000
That's all I have for you today.