Alan Cring Productions in association with the Emergent Light Studio presents
the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 240 for spring semester 2024.
Today, time value of money. We'll finish up the ratio analysis and then move on if we have time to time value of money.
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,
bull and bear markets, to give you some real world background in the subject of market performance and all that.
Before we do that, let's look at the numbers. Madam, whoa, there's a dead screen. I was just testing you.
Try that again. There, there's your screen. Okay, madam, bull day or bear day? Bull.
You got to say bull. Okay, well, not, no, it was actually, but then it died and the bears took over.
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.
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,
but it was bull, see it was bull all through the day and then suddenly something weird happened.
I'm sure that's not going to happen with my guest speaker here, a very bullish investor.
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
and the S&P is down a little bit and Nasdaq's down a little more.
So you're getting that bear market showing up and it's magnifying the riskier the portfolio, the more down it is,
except for the Dow, who knows what that's about. But moving over here to crude, crude oil,
the bears were really pushing the price of crude down through the last, since last night and this morning.
But then there was just this bull spike, it popped up for some reason and now it's just kind of bobbling around.
Some information that pushed the price up right there, but as you can see, once that information had been absorbed,
it just stayed there because there was no more information to push it one way or the other.
But we're still not, I mean the price of gasoline isn't going to go anywhere significant right now.
Although there was concern over the weekend, and I got some of that scuttlebutt,
about a certain politician who made some really kind of scary claims about inviting our enemy to attack our allies,
but that kind of rattled everyone for a while, but we got over it and figured, well, that's tomorrow's problem.
Now, going over here, gold and silver about dead in the water right now.
Over here, what's the 10-year bond? Notice it had an odd inverted V pattern.
It began with yields down, prices up, which means that there was buying pressure.
But then, after a while, that buying pressure came off and then there was selling happening.
And then, right now, it's down here, which means that the buying pressure has begun again,
and we've got a drop here, yields are falling, prices are rising,
so you've got bond investors jumping back in on the backside of the day, down in here.
Keeping a little bit of mind on this number right here, this is the current yield on the benchmark, 10-year treasury.
We watched that to get an idea of where interest rates in general are going.
Now, it has fallen a lot from where it was, even a few months ago, so that means interest rates are going down.
There's kind of a holy grail I've been hearing.
We're looking for, within the next couple of months, to see if it's going to break below 4%, 4%.
I mean, with interest rates falling, that's great for business activity, consumer spending, confidence, and all of that kind of stuff.
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%.
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,
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.
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.
But right now, it has fallen a little bit, there's a drop of 1.4 basis points, so yay for that.
We need to get it down 17.2 more basis points.
Rolling over here to see what's happening on the rest of the world.
There was some good news in Tokyo at the beginning of trading last night, last night in our time,
and bulls had their fun, but then the bears came in and they smacked it down, the bulls kind of groveled back,
but by the end, the selling had brought it back down to almost flat for the day.
If I'm looking at that correctly, yeah, barely up from the beginning of the day.
London, I heard some fellow, he's over in Britain, he said, we have an inverted London Bridge happening right now.
The bulls were opening it up, pushing upward, and then the bears just slapped it right back down and held it down underwater.
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.
Yeah, they've closed now for the day.
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.
I have to show you one. There are these stocks called penny stocks.
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.
Well, Friday, there was a company called BMR. It was the penny stock, and then today, 658% increase in one day.
That would be like you put $100 into it on Friday afternoon, and then today, you collect $650 from the investment in the stock.
Just insane. You don't see that hardly ever.
Anything of that magnitude, a penny stock that just blew the doors off on its way up.
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,
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.
Then it can make that happen on its own to create this perfectly smooth, extraordinarily realistic looking environment, even in three dimensions.
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.
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.
It doesn't pay a dividend, but there you are, right there. Just a monster explosion on the company.
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.
If you want to throw money at penny stocks, you can point to this and say, sometimes it happens. Anyway, enough of that.
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.
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.
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.
In fact, I think the bear is a... Holy milkshake!
I am the bull market.
Racial analysis. This is a rough business. Okay, now, let's go to Canvas.
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.
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.
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.
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.
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.
Spreadsheets. I hate how they do this. Okay, now, in spreadsheets, something that you'll find there now that's new is class spreadsheets.
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.
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.
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.
And soon enough, Excel will become married to Python and just shortly after that, Excel will become just completely embedded within chat GPTs.
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.
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.
I'm going to download it and then we can work on it here together. There we go. Top one. Yes, absolutely.
Now I'm going to go through these ratios with you. And make along the way, write down the explanations.
As I've said, I am not really too excited about you showing me that you can do this number divided by this number.
In my business, in our world of finance, we need to know what those numbers are telling us.
Certainly, it's going to benefit us to do the Excel calculations and get the numbers in there.
But then that's not where we stop. That we actually say, okay, why did this happen? What does this number tell us?
Instead of just saying, I'm done. I've got the numbers. I can go home.
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.
A couple of... Okay, right off the bat, formatting. Don't format...
A few things you can format, but don't go through and format every blessed number and every blessed word.
Well, I want that one bold. I better stop doing what I was doing and make it bold or italics.
Don't do that. Wait until you've got it done and then go through and make it pretty.
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.
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.
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.
It's double clicking all the time now. So anyway, so we've got these ratios. We started last time with liquidity.
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.
Like that. Yep, this mouse has about had it now. Seriously. Control C, Control V, Control V.
My God, this mouse is about, now it's about dead. Control C, Control V. Oh boy. I might not have a mouse today.
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.
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.
Now the next thing I'm going to do here is I'm going to do the profitability ratios.
And if I go here to my Excel spreadsheet, wait, oh I see. Downloads. Let me get that. There it is.
Okay, there we go. Oh, will you shut it? Quit it. Stop it. Okay, good.
Now let me go through here just briefly. You get to have this whenever you need it.
And so we're just going to follow the formulas that are shown here on this.
A lot of times I did liquidity first, but the sheet's doing profitability, showing profitability first. One more of that.
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.
So I'm going to go over here. Gross margin, net operating margin, and net margin.
A minor caution. I've done a lot of business. I've owned businesses and I did consulting for years.
It's funny that this gross margin is used incorrectly quite a bit in the real world.
When they say, well, the gross margin, they usually are referring to sales minus cost of goods sold.
They're talking about the gross margin. And that's not what it is in ratios.
And we use margin only for the ratio. And speaking of which, let me go over here. I'm going to show you something.
I told you about how financial statements don't always have everything that you want them to have.
Well, in this case, they don't have gross income, which we need.
Well, where in the heck? Is there some reason why this sucks? Where did that go? Oh, there it is.
It needs the gross profit, gross income. But it is not here on this company's income statement.
And that's actually not unusual at all. A lot of companies don't report it.
It used to be required, a mandatory line on the income statement.
The only company I've seen recently, if I remember right, Target, had the gross income line.
But a lot of companies don't even bother with it now. So I'm going to have to put it in here.
I'm going to go and highlight row seven. And I'm going to right-click, insert.
And I'm going to try right here, gross income. I mean, it's not hard to calculate.
It's just your equal to your sales minus your cost of goods sold.
There you go. And then I can drag it over a few lines. There you go.
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.
It's nothing terrible. It's just a little pain. And then I can do gross margin.
Now if you look at the formula sheet, gross margin is gross profit or gross income over sales.
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,
gross income, row cell B7 over total sales, cell B4.
Now try to remember to call out what cells I'm doing because if you're listening to the podcast,
that's going to make it easier for you to know where I am.
Okay, so we got gross margin. Now the next one we want is operating margin,
which would be equal to, that is operating income. Well, this company doesn't call it operating income.
They call it earnings before interest in taxes, EVIT.
So we'll just put in equals in the income statement cell B17 divided by cell B4.
And then finally, net margin equals your net income, your net earnings, whatever you want to call it,
equals, now we got to go down here and find that stupid thing, there it is, cell B27 divided by cell B4.
Now these are percentages. So I'm going to change these to percentages now before I copy them over.
Percentages, now house rules. Every company has how many decimal places it wants.
For our purposes, usually two is enough, especially for percentages. For factors, maybe four.
But I'm going to fix these now so that when I copy them over, I said when I copy them over,
yep, this mouse is about had it. Control C, Control V.
Okay, calm, yeah. For which one, for net? For the net margin? Okay, that would be equals,
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.
And I'm going to divide that slash by total sales, B4. Got it? Good.
Now, let me go back and explain myself. Gross margin, see that 12.46%?
That's telling you that of every dollar in sales, only 12.5 cents survived the wholesale costs.
That's what that's telling you. That's what gross margin just says in a nutshell.
Notice how that has collapsed from two years previous, when it was about 28.3 cents of every dollar.
It's now crashed down to 12.5 cents, less than half.
So in other words, as I had mentioned last Wednesday, their wholesale costs are eating them alive.
Their wholesale costs are going up faster than sales.
Now here's the thing, the first, the easy question, well not an easy question.
Let's try this. Madam, why would a company let wholesale costs go through the roof without the sales keeping up?
Why isn't U.S. Steel just passing its wholesale costs along to its customers?
That would keep gross margin from collapsing. You just pass along your costs, your wholesale costs are going up.
Well, you just pass that along to your customers. Why isn't this company doing that?
It's not easy to answer. I'm just looking for a genius. What did you say? Keep the customer happy.
Well, you know, I like to have my customers happy, but I like it if I'm rich, more.
If you're sad and I'm sad, that's great. But if you're sad and I'm happy, that's better.
Here's the thing, it's competition. That's a problem.
In an industry where there's competitive pressure, you can't just pass along your costs.
And steel is a global competitive environment. You've got countries all over the world cranking out steel.
And so you can't just, our costs went up, we'll just jack that along to the customers. You can't do that.
It doesn't work. You can bring up your price a little bit, but you can't pass everything along.
Not if your competitors aren't. They'll just walk right away from you.
This is the same thing that happens in retail, in grocery stores. You say, well, these prices have just gone through the roof.
And of course, obviously, they're passing along their costs.
But they are not passing along hardly any of their costs compared to what they're eating.
US Steel is eating its rising wholesale costs.
Even these stores where you see the prices of the groceries going up,
you would not believe how much they would have gone up if all those companies had just passed along their costs.
You see, unless you're a monopoly or an oligopoly, you can't pass along your costs, all of them,
because you've got competitors who are just going to say, we won't and we'll take your business.
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,
because it is in a fiercely competitive industry.
So that's what you're seeing here. And hence, your gross margin is going to erode.
And in this case, they are taking a butt bath on eating their rising wholesale costs.
Operating margin. It's heading down even worse.
Well, operating margin, well, that would mean that their costs aren't going, they are not cutting costs against gross margin.
They should be cutting their costs.
Well, there's only so much you can cut your costs before you cut into the meat and bleed to death.
A whole lot of companies think they can just lay off, lay off, lay off.
Well, you can't do that in some industries.
One, the Steelworkers Union wouldn't be letting you do that.
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.
You're cutting into your experience. You're cutting into the morale and all of that.
So there's US Steel is getting killed on wholesale costs.
It's getting killed because it can't cut operating costs fast enough, and so net margin eats it.
Fortunately, it's kind of unusual.
You don't usually see net margin higher than operating margin, but it looked to me like a couple of things were going on.
They were getting some non-operating income, it looks like, that boosted their net margin.
And possibly there were some tax breaks.
Let me look real quick here, see what was going on with their tax burden.
Yeah, look at that. See that?
They got some tax cuts. They benefit.
See how their taxes are much lower in 2023 than they were in 2022?
That's why the after-tax net margin rose a little bit.
That was it right there.
They got some benefits of some tax breaks or something.
And I certainly won't begrudge them that.
Okay, now there are two more profitability ratios that we need to look at.
The first one is return on assets and then return on equity.
ROA and ROE.
Now, return on assets.
Looking at the formula sheet, return on equity, return on assets.
Net income over total assets.
This is, you are in a, forget the term, metaphorical sense, treating your total assets,
everything the company has, as if it is a single investment.
And net income is how much you made off that ginormous investment.
So this is like the return on your bank account.
You put everything in there and see how much you make on it.
So net income over your total assets.
Equals, now we're going to go over here to the consolidated net income
in the income statement B, cell B27, divided by,
now I'm going to the balance sheet and grab the total assets, cell B15.
Now that's a percentage.
Now the next one is return on equity.
If I look at the sheet, ROE.
It's net income divided by common stockholders' equity.
Now, if total assets is liabilities plus owners' equity,
then this number, return on equity, has to be larger than return on assets.
Because return on assets takes all of the assets as a denominator.
Return on equity takes only the owners' equity as a denominator.
So the return on equity has a smaller denominator,
and therefore mathematically, arithmetically, it will be a larger number.
So we're going to take net income divided by total shareholders' equity.
So we say in the calculation sheet, cell B25 equals, I'll take,
I've got to go over here to the income statement, net income, net earnings,
cell B27 divided by, now going over here to the balance sheet,
we've got to go find total shareholders' equity.
Where the heck is it?
Where? Oh, there it is.
Total United States Steel Corporation stockholders' equity.
36, yes. Yep, and you see it's a little larger.
Twice as large as the fact.
Now I'm going to turn both of those, highlight those two returns,
and I'm going to turn them into percentages to two decimal places.
So for 2023, ROA was 4.38 percent, and ROE was 8.10 percent.
And then I'll copy those over to the year previous.
What a disaster.
Both of those have fallen to about a third of what they were.
You see a catastrophe here almost.
It's not the end of the company, but boy, they've taken a hit in 2023.
And this is not, well, this is the lockdown.
No, we were done with the lockdown in 2023.
This is business operations.
Bit the bullet on this one.
Wow.
Okay, let me come over here.
Current ratio, okay.
Liquidity, no, I did that.
Oh, debt, yes, debt, absolutely.
The debt ratios.
The first one is debt to total assets.
And the second one is times interest earned.
Now, see that first one, debt to total assets?
We have a couple of other names for that.
One name for it is capital structure.
The capital structure of the company is,
and that's the percent of debt and the percent of equity.
Now, the other thing is that we don't take total liabilities.
All we look at for the debt to total assets is their long-term debt.
So let me show you.
Going to, in the calculations, cell B28.
I'm going to take equals, and I'm going to the balance sheet,
and I'm going to find long-term debt.
Cell B24.
Use just long-term debt for this.
I mean, in a purest world, we take all the liabilities,
but the debt is the 800-pound gorilla.
Divided by total assets, which would be up above cell B15.
Now, this is a percentage.
So I'm going to, here, make it a percentage and make it two decimal places.
Say that again.
Do it again. Watch.
I'm going to do equals by all means. Ask me to do it again.
That's great.
Equals, I'm going to take only the long-term debt,
and this can be a real maze finding what you want in this briar bush.
It's right here, cell B24.
And then I'm going to divide it by total assets, cell B15.
19.95%.
So put in a little bit fancy terms,
the capital structure of U.S. Steel is 20% debt.
Now, technically what I'm about to say isn't correct,
but the capital structure is 20% debt, 80% equity.
That's not exactly right because we didn't take into account some other liabilities.
But this is a rough measure of it.
This company's total assets are made up of 20% debt.
So they've financed their total assets to the tune of about 20% with debt.
Now, is that good or bad?
We'll talk about that in a minute.
Remember, that number by company can be all over the place, 5%, 10%, 80%.
I mean, there are even these companies called LBOs that are 100% debt.
There is no equity, but I won't get into that.
Now, times interest earned.
Look at the formula.
It says earnings before interest in taxes, operating income,
divided by interest expense.
Now, look over here at the income statement.
Look, here's the EBIT line, B-17.
The very next line is their interest expense.
So EBIT is how much money there is to pay the interest expense.
So times interest earned, just takes the ratio of those, equals EBIT.
Where the heck is it?
There it is.
So B-17 divided by so B-18, interest expense.
And I'll make that two decimal places.
Dang.
So that's 11.10.
What that's telling you is that the company has enough money right before it pays
interest expense to pay its interest expense 11 times over.
I'll say that again.
11.10 for the times interest earned is saying that they have enough money right
before they pay their interest to pay that interest 11 times over.
Now, is that good or is that bad?
First things first.
There is a bad number.
If earnings before interest and taxes were smaller than the interest expense,
the company would be in default.
It would not be able to pay its interest.
And the bondholders would walk right in and try to liquidate the company.
And all the company could do is run to bankruptcy court and file for Chapter 11 protection.
So you really want to see that number above one.
And it's really nice if that has some distance above one.
Like for example, you have $120 and you owe $100 in interest.
That's scary.
That's a 1.2 times interest earned.
But if you had $10,000 and you owe me $100, well, that's fine.
You see that?
Okay, good.
So higher the better?
No.
It gets into something.
I'm going to tell you another term here for this.
On the calculation sheet, you see that debt to total assets of about 20%, 19.95%?
That is sometimes called leverage.
The problem is that a company that has too much money to pay its interest expense
could borrow money, more money, and still pay its interest expense
and use that money to invest in the company.
Later in the course, I'm going to show you how you can become millionaires.
And I'm not kidding.
Madam, would you like to be a millionaire?
Sure.
Sure?
No, not sure.
Say yes, please.
But actually, it all hinges on gains to leverage.
You see, because if I, and I'll show you an example of this,
how you can make a fortune in real estate over a period of maybe five years,
which people do.
They've been doing it for a long, long time.
But unfortunately, sometimes they get caught on the downside.
Think about it this way.
I've got $100,000, and I'm going to buy a property that I'm pretty sure will go to $110,000.
Well, okay, use all of my equity, $100,000, and come out with $110,000.
I've made a 10% return.
But what would happen if I were, instead of using $100,000,
I used $10,000 of my own money for 10 properties,
and then I borrowed $90,000 for each of those properties from a bank?
Well, you see, when the property goes to $110,000,
my loan will still, I'll owe back $900,000 plus the interest.
The amount I owe back will not change.
But all that extra that's over that, that's gravy to me.
That's called gains to leverage.
And that's how real estate geniuses make a very large amount of money
in a relatively short number of years, is through that gains to leverage.
And it all hinges on a three-letter designation, OPM.
Madam, do you know what OPM stands for?
You don't.
Other People's Money.
It's not even a joke, but it sounds like it.
You see, if I use other people's money and I owe them back a fixed amount
with interest, then if that thing goes way up in price,
the gravy is all mine because they don't get any of that extra.
I get it because I was the equity investor.
That's how we played it in a lot of different games in real estate,
and all those different things.
Even back a long, long time ago when I was involved in Indie Movie,
bringing the money together, we would use OPM.
Very little of our own money, but then if we could book,
I mean, it didn't ever go to theaters, we just went to VHS and beta tapes.
And then all that extra money we made over the cost of the production,
we paid back those people who had a fixed obligation to them,
and then all the rest of it we got to keep for ourselves.
It's done in all kinds of different industries.
You just have to find compliant banks who will play the game with you.
And that takes a lot of negotiating and some bullying, but it's doable.
And that's what's going on here.
You've got a company that had its sales go down, for God's sake.
Its sales went down because it's having a hard time with the competition.
They can beat its ass on technology, new technology for steelmaking,
for distribution, for the whole nine yards, for extraction.
So this is a company that could say, well, why don't we just borrow a lot more money?
If you look here, they borrowed hardly any more money.
And yet, what did they do?
They increased their property, plant, and equipment by close to $2 billion.
And they didn't do it with debt.
And so the equity holders are going to get nothing really out of that.
That is a great failure of this company.
It's just not using OPM.
And so in a very real sense, they're violating their fiduciary duty to their shareholders
by not maximizing the wealth of the shareholders.
And maximizing it in this case would be to get that debt to total assets up there a little higher.
They've got more than enough money to pay their interest.
So a little more interest is not going to kill them, not at all.
Typically, where do you see that times interest earned, like I said, it can be all over the place.
You get a little sweaty when it gets too close to one.
I see them a lot in the range of about six up to 12.
But, God, there are some companies that have times interest earned like 20, 25 times over.
They're just not using that capital structure to its maximum advantage to their shareholders.
Now granted, over the past few years, interest rates have been damn high.
And a lot of companies have been holding back on long-term debt, waiting for interest rates to go down.
So there is that. I'll grant them that.
But anyway, there's a lesson from that.
And as I'm going along, what I'm trying to show you is that the numbers are just the beginning.
You can have... This morning, I was driving here and I got an AI that I can ask questions to.
And I was asking it for the ratios of U.S. Steel.
And it was spinning them out at me.
Of course, I was trying to remember them and not have a car accident at the same time.
But at the same... I mean, this can be done.
The analysis, the think, what if, why, what else?
That's where we can come to the front as humans.
I have a chat GPT that I built for financial analysis.
It's not bad, but it doesn't have that human insight.
It just doesn't have it.
And it probably will in a few years, but not right now.
So you've got an advantage if you can just start to ask these kinds of questions.
Now let me go over here to the asset activity.
Now the first one, average collection period.
I'm not going to do it, and I have a very good reason why.
That reason is because I'm lazy.
If you look at the formula, the average collection period in the denominator is average daily credit sales,
which would be total credit sales for the year divided by 360 days.
The problem is that finding credit sales used to be easy, now it's not.
You can use a statement of cash flows to dig it out,
but directly you'd have to go to the notes of the financial statement
or to that 10K I showed you and go down to the MD&A and find it there.
It's not an easy one to find, and I'm not in the mood to have you find it
because I don't care to go searching for it.
So we leave that one out.
You take a higher level course from me, sure we'll have that.
Sure we'll do that, but not today.
Now the next two, especially the next one,
the other two in asset activity are inventory turnover and total asset turnover.
Inventory turnover.
It's sales divided by inventory.
You take your equals, go over here to the income statement,
sell B4 divided by, go to the balance sheet, find the inventory, sell B4,
and there you go.
There's your inventory turnover, 8.49 times.
What that tells you is that this company cleared its warehouses
about 8.5 times last year and then refilled them.
I mean if you were to count, well that one's been here for like 8 months,
no it's overall, overall, it wiped out its inventory
and put in new inventory 8.5 times, about every month and a half,
about every month and a half.
It cleared everything it had and got new in.
Now the total asset turnover goes back to something I said earlier.
If you were to take the entire company and see how many times you sold
the whole company and respond it.
So I'll take equals, sales, again sell B4 in the income statement,
this time divided by the whole asset, the entire company,
total assets, sell B15 in the balance sheet, there you go, 0.88.
So I'm going to make those, oh I'll make them two decimal places
and then copy it over, one period.
Now going back, going back, look at inventory turnover.
And I've already talked about this so this is sort of a review,
a little more intensive.
A huge thing since the 1990s was to increase that inventory turnover ratio,
to get the inventory in and out, in and out, as fast as you can.
That saves you warehouse space.
Instead of holding inventory that will last six months,
you hold inventory that will last you one month.
That saves inventory warehouse space, the opportunity cost of that space,
the lights, the security, all of that.
So if you get everything in and out faster, since the 1990s,
because the Japanese have a system for, at least in some of their companies,
some of their industries, where they have no inventory.
When they need something, they just have the supplier deliver it to the factory floor.
No inventory.
So in other words, inventory is zero, so sales over inventory is infinity.
Well, we can't do that.
We tried and it didn't work out too well.
But that just-in-time system, as we call it.
But we have been obsessed with increasing inventory turnover ratio.
It started at four.
We increase our turnover speed so that we have eight times a year
we turn over the inventory.
Well, let's keep cranking it.
Sixteen times over, we turn the inventory over.
That means less and less inventory at any given time
and a higher and higher inventory turnover ratio.
That was wonderful until the supply chain broke.
And suddenly, you had wiped out all of your toilet paper on the shelves,
all of your bread on the shelves, all of your salted snacks on the shelves,
all of your pharmaceutical lightweight stuff like alcohol, hydrogen peroxide, toothpaste.
All of a sudden, you sold them all.
By golly, you got them out of that inventory and sold them.
Now let's order more inventory.
Wait, what? Where's the inventory?
You say you can't get it to us. Why can't you?
Oh, because your suppliers can't get it to you, so you can't get it to us.
As soon as the supply chain started to break down, it just collapsed.
That's why store shelves were empty during the lockdown.
And they haven't even recovered yet.
Don't let any of these geniuses tell you,
well, it was a complex thing with a lot of different global factors.
Bullshit. It was just that we had been pushing it, pushing it, pushing it, until finally,
you, sir, I want you to get two assignments done every night.
Well, I mean, I'm going to increase that to four.
And then, oh, fine, okay, let's get it to eight.
You can push yourself harder and harder.
Well, you know what finally happens?
You say FTS before my head explodes.
You can do it only for so long.
It all happened one night when you couldn't do the homework
because you'd eaten a Taco Bell,
and you couldn't take your homework into the bathroom with you.
I understand. I'm with you there.
Don't send that to me as an excuse in your email.
Seriously, dude, I've had enough appalling explanations said to me over the years.
I don't... anyway.
That last one was just too much information, too much sharing.
Here we go.
Well, this US Steel actually is going the wrong way, though.
You do want your inventory turnover ratio to be robust.
Now, there is a limit to that.
As I said, you've got to have inventory buffer.
That was the thing that was lacking in this speed up the inventory turnover ratio.
You were leaving yourself completely without a buffer.
So we don't want it to go too high, but US Steel is going the wrong way.
Do you see how it actually dropped a little bit? It wasn't significant, but it did drop.
Now, look at the next one.
That's worrisome because we're saying how many times over did this company sell itself and then respawn?
And that's a low number. It's not terribly low, but it dropped noticeably.
Fortunately, there's a good explanation for why it dropped.
I showed it to you just a minute ago. Look at this. Look on the balance sheet.
Look at the property plant and equipment from 2022 to 2023.
It went up by almost $2 billion.
So that's a lot more to turn over.
It would be like, madam, you are a total asset.
Last year, I turned you into a slurpee and I sold you.
Well, since that time, you have gained a lot of weight.
About 25%. Easy.
I don't want to live forever, but I want to live past this class.
Now, I turned you into a bigger slurpee.
It's going to be harder for me to turn you over, to sell you.
All in one giant slurpee you get when you go to the movies.
It's like five gallons.
You are more, so it's going to be harder to turn over the totality of you.
That's what happened here in the US Steel's case.
That's why their total asset turnover ratio went down so noticeably.
It was because they put in $2 billion worth of more assets than they had before.
Now, my criticism there still is, stands, you did that with equity and retained earnings.
You did not do that with debt, which is what you should have done.
Because your time's interest earned could have sustained a lot more interest payments than it has right now.
But nevertheless, that inventory turnover ratio, that asset turnover ratio, did fall, but there's a good reason.
Just a lot more assets this year than last.
Okay, good.
Okay, I've got debt.
Okay, now.
Market.
Now, the first of these is the price to earnings.
And I will tell you right now that I would not ask you to do it like a ratio.
You go and find it on some financial service.
They all report P-E ratio.
Technically, the P-E ratio is the price per share divided by the earnings per share.
Well, the problem with doing that as a ratio is that I would be picking the price off that's bouncing,
boing, boing, boing, boing, boing, boing, all over the place day to day.
The market.
You see how those numbers change all the time.
And the earnings, well, you'd have to chase back to some historical number from the financial statements.
So you'd have a market against a financial, and that market is so volatile from one.
Hell, you saw one today that went up by over 600%.
So it's not going to be a good idea to do that one.
Just go and get a service.
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.
Don't do that.
The next one, however, is important.
Market to book.
Your textbook earlier, I think it was chapter three, they said that there is this number,
takes the market value of the company minus the book value of the company.
That's a terrible way to do it simply because you'd be looking at billion dollar companies
and trying to compare those to million dollar companies.
So the market to book difference, market minus book would be, I mean, you couldn't do any comparison.
Market to book, however, takes the market value of the company.
That's the market cap.
It's right there for you on any service and divided by the book value.
That's the total shareholder's equity.
Now, let me explain why this is a very useful thing for you.
Looking around here, I've got to find someone I haven't bothered for a long time.
Someone who looks youthful, I haven't bothered you.
That's right, you.
The intellectual with the glasses and all that.
Okay, here.
You are my son.
It wasn't my fault.
Look, it was Decatur and truck stop.
But anyway.
I get so much trouble for my Decatur jokes.
Okay, listen.
I raised you right.
I spent a quarter of a million dollars to get you to the point where you were out on your own.
A quarter of a million dollars.
Now you're out there and the future is in front of you.
Okay, let me calculate the net present value of the future expected cash flows, his earnings.
And I've come out with a number that your value right at that point is five million dollars.
The market to book therefore is 20.
Five million is what I got out of an investment of 250,000.
Now accounting numbers are historical, but this one is important.
Because that book value, total shareholders' equity, that is measuring a real thing.
See, when people buy the stock, they become that money is shareholders' equity.
When a company earns money after pays all its bills and pays a dividend, the residual goes into retained earnings.
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.
That's the 250,000 dollars.
The market price times the number of those shares outstanding is the market value of the company.
That's how it works.
So the accumulated, we got this money from stock and we also got this money for the shareholders from our operations.
That's a whole nine yards of what the shareholders have sacrificed.
The market value over here, let me take this, get over here to Yee-Haw Finance again and get U.S. Steel up.
There it is.
10.242 billion dollars.
That is what the market says all of that money has created in value.
That 10.242 billion dollars is the five million in my example with him.
So if I took this number, and I'll have to, you've got to watch it.
This is where I screw up so much.
These numbers, let me go over here to the balance sheet.
See the total shareholders' equity here?
Right here, it's the 11,047.
That's in millions.
So that's 11,047 million.
So you've got to watch it because usually Yee-Haw Finance gives things in billions.
So I've got to write that top number, the market value, in millions.
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.
I have to turn that into millions, so that would be 10,242 million.
You've got to watch that.
It's just one of those things.
I won't make it so that that trips you up.
But I'm going to say 10,242, try that again, equals 10,242, is there some reason this sucks?
That equals 10,242 million.
Why?
You know what?
Equals 10 million.
Equals 10,242,000.
And divide that by the total shareholders equity on the balance sheet, which is right here.
This company sucks.
This number should be 10, 20.
In other words, what you were saying was that.927, which is about.93.
U.S. Steel has actually devalued the total money put in by shareholders through investment in the stock
or through giving up dividends and letting the company plow back profit.
It was in the last year, let's try, dang.
Really?
Nope, not going to get it.
It was about 1.01, I think.
But one way or the other.
This company, it's like putting $10,000 in the bank and the bank says,
well, now we've got $9,300 of your money.
That's a problem.
U.S. Steel is in trouble.
I will save this and it will be in your worksheets later this afternoon.
That's all I have for you today.