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 341 for Autumn Semester 2024.
Today, financial statements. Now, before we do that, of course, we will look at the numbers.
Now, when we go to financial statements, this is going to be a sort of a live fire kind of exercise.
We pull up a set of actual financial statements from Edgar filing service,
and we break it down in a financial analyst sort of way. We do not do it in an accounting way whatsoever.
So that we are not accountants. I'm not going to teach debits and credits and all this,
and double entry ledgers and all that. It is let's break the numbers down.
Let's fix what the accountants say so that it means something to us. All that great stuff.
But anyway, before we do that, let's have a look at the numbers.
And the numbers are just all kinds of bouncy to some extent.
You notice the Dow has been up and down and up and down.
Right now, it is flat zero from where it ended yesterday.
The S&P 500 is just blazing ahead with.21%.
So the NASDAQ, well, the NASDAQ is showing a little bit of life, a little more than a half a percent up.
But it is definitely a dull day. Now, there was a spike.
You see this spike right here. And then it flattened out.
Some information punched into the market, brought the stock prices up,
and then no more information, bad or good.
So now it is just floating, waiting for something exciting to happen.
And if you look over here, crude oil, it keeps having a surge.
And part of it, someone mentioned to me, well, if you look at these surges,
they are often associated with either one side of the Israeli Hamas conflict making an attack,
or the other one doing a retaliatory attack.
And then it spikes on that. And then once that doesn't lead to anything like a full-blown war,
then it goes back down. And that is what happened here.
There was a strike this morning, and of course, the war premium ballooned for a little while.
And then once that didn't lead to a nuclear exchange or whatever the heck could happen,
then the market calmed back down. And it slid back.
So you are going to probably see these kinds of pops and then go back down
every time one of the combatants does an attack on the other one.
And hopefully it will go back down because there won't be an instant escalation to full-blown war
and a declaration of war and all that good stuff.
But one of them might be, we don't know, but for right now, the oil markets are pretty stable,
except for these jumpscares that they are doing.
Gold has been showing more of that gold bug. Uh-oh, times are getting bad.
It's been pushing its way up.
I mean, there are a couple of metal jockeys who are saying $3,000 an ounce by the end of October.
And that's pretty staggering.
Now sometimes you'll see gold surge on inflation.
But inflation is really under control here in the United States,
and they're getting it under control in Europe and Asia.
So this is not just an inflation-driven run-up.
This is the conspiracy theorist getting excited, and silver is following it,
which is a little scary when you think about it.
But now, bond yields, on the opening, when bonds opened this morning, or late last night, bond yields had popped.
There was a major sell-off of investors in bonds. They were selling.
At first, we thought that money was going to go right over to equities,
and we'd have a major jump in the stock markets, in the stocks today.
It didn't. It popped, but that money didn't go over to equities.
It just went straight into cash, into money markets.
So that was kind of a false hope that we could see some good upward momentum on stocks out of that sell-off on the bond market.
Selling the bonds drives the prices down and drives the yields up.
But notice that that sell-off didn't last before the prices of bonds began to recover later in the day with buying back in.
So there you go. We're back down to almost where we started.
A one basis point increase in the yield. Whoop-de-doo.
Still, the question is, why are yields on bonds so busy going, inching their way up,
when the Fed has given candy more than we would have expected with that lowering of the discount rate?
What in the heck do the bond markets want?
Do they want another 1% drop in the discount rate?
What is it that they're all so excited about that they're doing these sell-offs of bonds,
which is pushing the yields upward on the benchmark and other bonds?
We just don't know what it's all about right now, so we're going to have to just sit and let it play itself out.
But as long as those yields are not going down,
we're not going to get the decreases in interest rates that we want to juice the economy
the way we would like to see going into the Christmas season.
Ideally, we're going to see the yields beginning to come back down again
before the buying season, starting with Black Friday, starts in earnest.
That's what we are hoping for, and this is what we as finance people think about,
is that forward expectation and what we need to see happen for things to happen the way we would like to see them happen.
So anyway, moving along from there, the currencies are just being absolute potty mouths today.
But as you can see, over in Tokyo, there was a surge this morning,
oh, late last night, that was morning over there.
But then it dropped off and it didn't go back anywhere from that sell-off.
Fortunately, it wasn't as bad a sell-off as it could have been,
so Tokyo did finish up on the positive side half a percent up, a little more than half a percent up.
So at least that's good news.
It's not those down days that we were seeing for so many of those earlier in the last couple of months.
London starts out in great shape, and then it started to slide off too.
And by the end, it was up barely a quarter of a percent, big flip, although I think they're still trading right now.
I never do remember those times of overseas markets properly.
But anyway, looking around the markets just for a little bit, just as a predicate to doing financial analysis,
we'll look at a couple of companies.
Now I want to revisit the banks to see how they are faring.
Notice that Citibank, and you'll see this is true of others,
it has given up a lot of what it made over the last week.
And so essentially there's something fundamental that is not the best thing for banks right now,
because they should have sustained that price increase that occurred on Friday and on Monday, mostly on Friday,
and they just didn't.
And if you look over the year to date, God, look at that volatility.
Do you see the volatility?
Beta is part of that.
Of course, just the price volatility includes systematic and non-systematic volatility.
But even at that, that is just a cowboy ride on Citibank, all those ups and downs.
It's really hard to read anything into it.
Now again, and I'll bring this up, old school technical analysis,
the whole thing about you had rising tops and you had rising bottoms.
And then it broke that neckline of those two rising lines.
And that was right there a warning shot that we're not going to be in a good time if it breaks the neckline that hard.
Again, the necklines, you had, see these rising tops here and these rising bottoms?
You call those necklines.
It can test the neckline, but if it keeps going up, then that means that you do have a true buy signal.
But if it tests the neckline and it breaks through it, that is a big warning sign that it's on its way down.
And that old technical rule really did come through this time.
As you can see, once it had broken that rising tops and rising bottoms pair of necklines, it just went to hell.
Now it did recover some, but right now I see this is not a good buy signal at all on this stock.
Even though intrinsic value, it's probably a little undervalued.
But remember, undervalued and overvalued is something that you talk about in many months or years,
not tomorrow or even next month. So there you are on that.
Now looking at the other one that I had looked at before, BAC, Bank of America.
And as you can see, down again. So those gains that were made late last week, they're gone.
They've just shed it. And the question is, what's going on in the banking sector?
And the big thing is, well, there's fundamental weakness. Those bank stocks are fundamentally weak.
The big, too big to fail, the big 10 banks, they have been structurally weak for over a decade,
almost a decade and a half, probably. Well, actually, honestly, for about two decades,
they have been structurally weak. And we can look at the financials.
You can because you are now getting enough learning, education, that you can look at those financials for yourself,
and you know darn well, their free cash flow position sucks. So how are they paying their bills?
Well, it's simply because there's a back door from the Fed that is just keeping them in business.
And if that ever were pulled, which it won't be, but if it were ever pulled, these companies are basket cases.
They are fundamentally not well-run, financially profitable corporations.
Just out of curiosity, looking at Wells Fargo. Just a...
Nope, I didn't want to do that. Wells Fargo near me? No, I don't want to know where this one near me.
Wells... come on. Wells Fargo.
Why am I having... Gargo. God. Don't get old.
Just let them put you in a home where they feed you something that makes you go to sleep and never wake up.
Yeah, wow. Okay, there you go again. Look at this. I think I see a pattern here.
The bank stocks are visiting thissucks.com. You see that fundamental weakness.
That even juicing the interest rates down, which gave them an immediate adrenaline rush,
but they just returned to where they were before in this bad situation.
So that's something to concern yourself with. Now, looking over just at other companies,
like going into the fangs, nothing spectacular, but Apple's doing well.
Meta should be doing well today. Not incredibly well. It's not a good market day.
Ooh, Meta's down a little bit, but that's not much to say considering how expensive that stock is.
But if you look at some of the others, Netflix, NFLX...
Whoa, hey. Well, look at that. That's a lot of dollars when you've got a stock that's $719.71 a share.
Now, I heard a rumor. Now, really, this should not matter to us in finance, but some amateur analysts get all excited about this.
There's a rumor, story in the swirl around that Netflix is going to have a stock split.
It's a rumor, and I didn't even get it from a reputable source.
But even if there is a stock split, that should not fundamentally change intrinsic value per share of the company.
So, yeah, they do a two-for-one stock split, the stock will drop in price.
They do a 10-for-one, it'll become a $72 stock. And, oh, everyone will buy it at that.
Well, that's not the everyone. It doesn't matter. Fund managers have the money to buy it, whether it's $72 or $720.
So a stock split really shouldn't have any material fundamental effect on intrinsic value.
But there are those who believe that it really does. The data does not support that.
But if you're into that kind of thing, whatever, one way or the other.
As you can see, Netflix, interestingly enough, Netflix is risky and it's overvalued, doesn't pay a dividend.
So the only way you make scratch off this stock is if the stock price goes up.
You're not going to get a dividend check so you can buy some cat food for your old grandmother.
But it's just not one of those that's for the normal investor.
And that's where we come back to that appropriateness of investment.
Typically, an investor in a reasonably good time, when the economy is looking okay, they will probably,
you'll see the beta somewhere between.8 and 1.15.
That's a typical responsible investment portfolio, leading more toward the high end for a younger investor,
more toward the lower end for a somewhat older investor.
But that's neither here nor there.
Now interestingly enough, notice Yahoo. And I do want to do this.
Yahoo Finance is saying that Netflix will actually shed value over the next year.
Now if you do it as a capital gain calculation, we don't have to worry about a dividend yield here.
What we could look at, get this into a scientific calculator.
You calculate the holding period return, whatever it is, and this will be a one year, so it will be an annual.
The ending value, which would be in one year, $698.10, divided by the beginning value, $719.
And 54 cents minus one, don't forget to subtract the one, equals.
Now you multiply that by 100 to turn it into a percent.
Now if they had a dividend yield, you would add the dividend yield there.
But for this company, you're writing just capital gain.
So Yahoo's financial projection is saying that holding this stock, you would lose just a little under 3% for a one year hold.
If you bought it, sold it in a year, you'd lose about 3%.
Now here's some investment advice. Don't do that.
If it looks like the stock's going to go down, that's not a good idea to buy a stock like that.
So whether or not Yahoo's projections are good, accurate, whatever, this is one set of analysts saying,
you're going to lose money on Netflix.
You don't get a dividend, so you're not going to recover anything by getting a dividend check in the mail.
Going over here and looking at, let's say, let's look at one that's probably going to do well over the next year.
Let's look at Verizon. A lot of analysts think it's going to look good over the year.
Very safe stock. P-E ratio shows it's undervalued.
Now if I were to run that stock through that capital gain calculation, $45.91 divided by,
that would be the ending value divided by the beginning value, 44, minus one.
Don't forget that minus one. I forget that all the time.
Then multiply it by 100%.
So your capital gain yield over the next year looks to be about 3.31%.
Look at that dividend. This is a big yield.
So I add that in. So your total holding period return of one year would be the capital gain yield plus the dividend yield.
Well, spank me. That's a pretty decent, and of course, it's a lower beta stock, so that's nothing to sneeze at.
That's a darn nice win on that one.
So Verizon obviously would be, if you've got money to throw at investments,
and you do want to play a little bit shorter game, Verizon is much more prospective for you.
As a matter of fact, just to finish this, I've got two more to show you. AT&T.
Now, isn't that interesting? Look at this one.
Because this one looks like it will have a capital gain yield as far as their projections go.
The ending value of $21.39 divided by the beginning value of $21.50 minus one.
This will lose a little bit, about half a percent, in capital gain, but it has a darn decent yield on the dividend.
So we add in the dividend yield plus 5.17 percent.
So over the next year, this stock will be, looks like it will pull about 5.16 percent total holding period return for a year when you're holding period.
Isn't shabby, but notice that Verizon is dominant, because Verizon has a lower beta,
and it has a better total holding period return for a year.
So if you were to do a comparison, you don't want to load too much into any industry sector.
You're getting too much correlation doing that.
But if I wanted something in telecom and I was down to Verizon versus AT&T,
I would say that Verizon probably is dominant here.
Even though you'll lose money on the stock, you will gain more on the dividend yield.
And that's one of the ways, this is some of the just quick back of the envelope calculations that we do for stocks.
And it's not that bad.
Overall, doing this kind of, we used to call it panel analysis, just a panel of numbers.
You just put them in, just crank out basic arithmetic,
and usually over a period of time, you are going to be pretty well off doing this kind of investment.
I want to show you one, and this is, first of all, the rule is,
do not let your politics interfere with your investment decisions.
That is stupid ass to think, well, this party is going to win,
and I think that's going to be good for business, don't ever do that.
But once in a great while, and this is something I don't know that I've seen so clearly,
over, actually in my lifetime,
where you can actually see the market's assessment of a political candidate.
And I think I already showed you this one.
DJT.
Now let's have a look at its one year hold.
You notice that it's spiked up to a high of 79.38,
but it has been sliding ever since then.
It bottomed out, actually, I think it bottomed out today,
was today the day that it bottomed out?
Let me see this.
Maybe this was the day that it bottomed out.
But notice something about a stock like this, is that it is extremely volatile.
See that 5.88?
I mean, if this thing had a saddle, you'd think you were in a rodeo.
But at the same time, interestingly enough,
just because you've had a massive downslide in a stock,
sometimes that is actually a buy signal.
Because essentially what investors think the mentality is,
okay, it's been punished way too much,
so there is the possibility of a recovery.
Bring it up, because it was oversold by panic sellers.
And then that's when you can grab a couple of shares of it,
and if you look at this, the 52 week,
just a couple of days ago, or yesterday maybe it was,
was it today?
Maybe it was today.
It bottomed out at $11.75, but then it has come up from there.
This is call option bait.
This is what some people actually play relatively short,
two week call options on this kind of a play,
where it drops so much that you know damn well that there could be a recovery.
So you just buy some call options, just a little out of the money,
and just ride them for a couple of days just to see if it does recover
based upon a sentiment that it was oversold.
I thought I'd show you that.
Sometimes it's worth your while to not write off a stock,
especially if it goes down so fast that there is a possibility
that panic began to set in and it was sold too far in, too far down.
It's just something to keep your eye on.
It's just something to keep your mind on.
Okay, enough of that.
Now I'm going to go to a darkness.
It is accounting.
And as you know, my sentiment about accountants is not all that great,
but we are consumers of their information products.
Their business is to generate information products for different constituencies.
Their constituencies include the management of the company,
external regulators at the federal and state and sometimes even at the local level,
current investors are a constituency, prospective investors are a constituency,
unions are a constituency.
All of these groups use accounting information, the accounting products.
The accountants crank these out and then the consumers come to the warehouse
to get them for different purposes.
In our world, our purpose is first of all to get them and then to tear them apart
because what the accountants do is not what we want.
We have to rearrange and sometimes we just have to speculate.
One of the problems that is dominant is that it's historical data.
It's always historical data.
And history, you know, preface is not prologue.
We know very well that the future in our world, the future is not dependent upon the past
because as far as stock prices go, any information that has already happened
is already in the stock prices for the most part.
Now something might pop out that we hadn't caught and there are good examples of that.
One is GameStop.
As I told you, GameStop had been a whipping boy for months if not years on Wall Street.
It was just a fun stock to short, make money off it, and you could guarantee that it was going to go down.
So it was like a money engine for a couple of these slack houses as we used to call them.
They just short the stock and they knew that it would go down and they would cover their short
and make a lot of money week after week, month after month.
Good news, well then there was an observation made that really should not have escaped financial analysts.
It had to do with GameStop's liquidity.
GameStop was swimming in cash.
If products sucked, it was still selling shrink wrap and in a world of streaming gaming,
that's not a good idea at all.
You still had some old grandparents coming in, oh, this looks like a good game.
I'm going to take this and put it in my PS1 kind of thing.
But yeah, it sucked as far as its business model went, but it was still sustaining
because it did sell the gaming systems and that kept revenues from crashing into the cratering.
But all that cash, the thing was just a giant lake of money, literal money, not capital, money.
And so a few analysts began to say, wait a minute, this might have been underpriced all along
because no one was looking at the essential survivability of the company.
Now you sir could decide that you're going to be a lazy person for the rest of your life.
You're going to eat Cheetos and play World of Warcraft down in your basement.
I know, World of Warcraft really, but okay.
But I also know that you've got this one room that is full of $100 bills.
So any prediction that I might make that you're going to die tomorrow of starvation and all that,
I'm not looking in that room where you have enough money to sustain yourself until you can get your shit together.
That's what GameStop was.
The financial statements, it was right there and yet it wasn't being reflected in the stock price.
That's part of what we do is we break these down and do our best to see what secrets are hiding in the numbers.
Those numbers are telling us things.
Not only are they telling us things about the company, they're also telling us things about the management of the company.
And what the management is, it just keeps going along the way it is.
Is there a fundamental change in how those ratios look to us?
What's going on behind the scenes?
And sometimes those numbers can tell us a lot about what's happening in the boardroom,
what's happening in the C-suite, in the private meetings.
So we look at them from that perspective.
What can you tell us?
What are you saying that no one else can hear?
And that's one of the big things we do in financial analysis.
We're doing something that other constituencies don't do.
We're looking for the secrets in those financial statements.
And without further ado, and I've shown you this before, one of the things that we use,
one of our original resources is the filings companies have with the Securities and Exchange Commission, the SEC.
We rely on those primarily because they are the disclosures in those, the numbers, the stories, the facts, the explanations,
must be materially accurate because not only can the company be fined if it materially mistakes,
so can the directors and officers of the corporation under Sarbanes-Oxley.
And if they are way out of line, the SEC does civil prosecution.
If it's way out of line, they'll just take all their paperwork and they'll hand it to the DOJ and say,
why don't you start thinking about criminal prosecution? And that would be a death knell for a corporation
because they'd be getting prosecuted on civil charges by the SEC.
They would be prosecuted on criminal charges by the DOJ.
Companies don't want to do that.
The only company I know that is defiant is Tesla.
And that's just because it's run by a crazy mofo.
But moral companies, they'll say, hey, hey, we're telling the truth.
We don't want to lie.
And if they are caught, then they really, really, they have a lot of soul-searching.
Search filings.
And I hate the way they've done this because the search bar is below where I see it and it confuses me these days.
OK, now we want to look at a company.
The problem, and I'm just leading you into it, you're going to see this for yourselves as financial analysts in other courses.
Some companies have a reputation for giving really great, old-style financial statements.
They use the right names for things and they include all the lines that the SEC doesn't make you include.
We love those companies.
But you can also step into companies where it will confuse the flip out of you what's going on.
A great example of that would be Target.
Target's a good example.
Target does one thing that we love.
There's a line in the income statement called gross profit.
Your revenues minus your cost of goods sold.
Gross profit.
A lot of companies don't put that in there.
And then I forget and I do all these ratios and then I say, oh, God, I've got to go back and put the gross profit in.
Target does that.
Great.
But the nasty part about Target is, well, let me show you.
I may already have done this, so you're going to look like a genius to me if I already did this.
Let me do Target here.
I'm not going to use Target.
Now, we're going to go to the 10Ks and we usually, just because they're annuals, we grab the 10K, the last annual, which in this case was last March.
Now, that would tell me that their fiscal year is a calendar year because of the number of days after the end of the year the SEC requires a company to file the 10K in.
So, but you press the filing button, for God's sake.
Now, if you want to see the actual 10K, the one that people like me used to do for companies back when we were allowed to do that, it is a beast.
It is a monster document.
We're going to forego that and we're just going to hit this interactive blue button over here on the left side just above center.
And then we can look at summaries of the financial statements right here.
Really nice.
But every company that is a public company is required by the SEC to provide its financial statements in Excel.
And when we're talking about Excel, we're talking about Excel from hell.
They put so many, look at all these tabs on this.
Every blessed financial statement you could imagine, everything from the classic income statement, balance sheet statement of cash flow, statement of retained earnings.
They even disclose the leases, long-term leases, executive compensation, how to do the hokey pokey.
I mean, it's just like everything you could want is in here.
And that makes, remember, every company, hundreds of thousands must do this every quarter and every year.
And so it is a big project in a company.
And if you get into a company that is a public company, you may very well be tasked to one of the teams that are getting all these together for the auditors and the lawyers
to review and clean up.
So it is quite a Herculean thing.
But Target, I'm going to first, I'm going to show you again, and I may have already done this.
I think I did.
But best practices when you're dealing with Excel, and that's one of the reasons you need to do Excel is because every company on earth is using Excel.
Even your mama is using Excel now, I'm sure.
It's that big.
Now you have a couple of, what was that dime store thing?
Go clear back over here, okay, cover page.
Here you get basic information.
Now remember that if you're taking a class where they have a term paper where, what is the official address of this corporation?
Right there it is.
That has to be it because they can't lie about where their operation originates to the SEC.
So you know that that is the official legal business address of that corporation.
And they're in Minneapolis.
Didn't know that.
Audit information, they have to disclose these guys because if those financial statements have material misinformation,
that auditing firm is going to be in the gun sites of the SEC as well.
As a few have found out over the years to their extraordinary detriment.
But now, consolidated statement of operations, that's a fancy way of saying the income statement.
Okay, we like that one.
Now another one we'll want is the balance sheet.
Well, that's not it.
There we go.
Consolidated statement of financial position.
That's a fancy way of saying the balance sheet.
Okay, I like that one.
More of that, so I'm going to slide that over so that it sits there right beside my income statement.
This is just like any work environment.
You rearrange the platform and its contents so that it is easy for you to reach for what you need for the work that you do.
Now I'm probably going to want the statement of cash flows, and this is the one that drives me crazy.
Statement of comprehensive, statement of, nope.
Hey, there we go.
Statement of cash flows.
So I'm going to drag this one over here too.
I'm regretting doing this already.
Put that one next to the balance sheet, which is next to the income statement.
So I have them all together so that I can reach around and have quick looks.
Now I'm not going to spend a lot of time on this bad boy, but there are a couple of features and one thing that I will do here.
The first thing is, and I'm repeating what I've said earlier in the course, do your recon.
Don't go in with your guns blazing, your calculator out, and your mad Excel skills ready to attack.
Sit down, shut up, and look at the numbers.
What do they say?
And this is good old fashioned responsible analysis.
Okay, I see that the company revenues, there is a problem, I see it right here.
For fiscal 2023 or 2024, I don't know how they work that.
I see that this company, its revenues had increased modestly from 22 to 23, but then from 23 to 24, this company lost revenue.
Here's a rule.
That's not a good thing, losing revenue.
That's just at the top of the list, the company has stopped growing revenues, and now that puts us on guard that we've got a problem.
You go down, now we're going to do some percentage analysis here before the end of the class today, but I'm just going to look.
I see that they had a pretty strong surge in wholesale costs from 22 to 23.
That's the inflation probably hitting them pretty hard.
But then I see that they actually trimmed their cost of goods sold and going from 23 to 24.
That's a good sign because they lost revenue, but fortunately their cost of goods sold, the wholesale costs, they managed to keep those going down.
We'll have to see relative percentages.
But, well, no they didn't.
I thought they put in gross, they don't, so I'm going to have to put that in here.
Insert, we need to know the gross profit or gross income.
What do they call it?
Gross income.
They call it income.
Profit's such a harsh word these days.
And then that is always going to be just equal to this minus this.
Okay, we got it.
Now we can drag this over for the other two years.
So we see that they're interestingly, now this is interesting because I see that the gross income, they lost ground on gross income in 22 to 23.
Do you see that?
But they actually recovered.
Even though the revenues were down, they handled wholesale costs so well that they managed to bring up their gross profit.
So I'm not nearly as upset as I was when I saw that revenue.
They freaking controlled their cost of goods sold very well.
And this was in an environment where there was still plenty of inflation.
They were facing strong inflationary pressures on their wholesale, but they managed to keep it under control enough that they actually, even though they lost ground on revenue, they gained ground on gross income.
Okay, now I see the selling general and administrative expenses.
Notice that they are growing.
I'm not really concerned.
That's not a major gross.
SG&A, salaries, wages, the light bill, all those things like that.
You know, not too bad though.
I mean, I'm not going to bitch about that.
Now, the depreciation and amortization, the only reason we're going to get rid of it here when we calculate when we're going after free cash flow.
However, I do want to notice one thing about it.
You notice that their depreciation and amortization expense slid, well, rather, I'm sorry, rose.
So before I look anywhere else, what does that tell me?
What does that tell me?
You got anything?
That's capital investments.
They've got more to depreciate.
They have added, they've grown in infrastructure.
That's basically the only thing that I notice from that is if they've got more depreciation and amortization expense, that means they must have bought more fixed assets.
To depreciate and amortize.
Okay, so that says that they're not sitting on their fat assets.
Now, I can quickly just run over here and just let's have a quick look over at property plan equipment.
Yep, see it?
They're investing.
In other words, they're not eroding.
They're pushing forward.
So the depreciation and amortization just told me that and I just went over and confirmed it.
Yeah, they're pouring capital in.
Okay, good news.
And all that.
Now, the net interest expense.
Your turn.
What's going on there?
I see net interest expense going up.
What does that tell you?
You got anything for me?
Throw me a bone.
Yeah?
They're paying more in interest probably because alone they took out.
Good, good.
They're leveraging.
Exactly.
They're leveraging.
And probably the interest rates were pretty high, but they're still leveraging.
So good news.
I mean, well, yeah, I mean they're borrowing capital to keep that growth going.
That's probably largely how they financed that expansion of their property plan and equipment was through growth and they borrowed the money to do it.
Interest rates are higher, but they're not going to let that stop them.
This is an old principle in finance.
There should be a separation between the decision on whether or not a project is good and how to finance that project.
That should be something that how we finance it.
You answer that after you decide whether it's a good project or not.
Granted, we oftentimes use the weighted average cost of capital to find that present value, and that goes up with more.
But at the same time, we should avoid saying, well, we can't do it.
It's a great idea, but we can't afford it.
And I saw this years ago when I went to some of the casinos when I had some leave time and passes.
One of the things I saw about some of the card tables was the winning, the guys who won the most, there was one game.
I cannot remember what it was, but there were a set of cards on the table and you had to take a certain number of them to get to a card you wanted.
So you had to take some that you didn't want to get the card you wanted.
Now this son of a bitch, he'd see a card way back there that he wanted and he'd just take the whole thing and just deal with the mess that he had.
And he won a lot more than he lost.
And this is one of those things about, and I think as the years go by, this is kind of like what we're talking about with that separation theorem of separation principle
in financing versus accepting projects.
Yeah, sometimes you're going to have a mess, but if it's a good project, you're going to deal with the mess.
You're going to have the accountants and some of the bean counters in the finance lower levels bitching at you,
and you may even be called in and yelled at by the CEO, but at the same time, that is actually, from what I saw,
and this is anecdotal obviously, but the winner was the one who just would take all the, he saw, I see a card back there,
12 in front of it that he doesn't need, but like that.
And that's the whole idea, even in a high interest rate environment, if it's a good project, you finance the damn thing whatever way you can.
If you have to sell stock, sell stock in a seasoned offering.
If you have to sell bonds that have high coupon rates, do it. Just get it done and get on with this project that looked good to you.
Anyway, enough of that. Okay, now go down to net earnings.
Now this is why we really don't worry too much about profit. That's an accounting thing. That's a talking heads, well their profit went down.
We don't give a rat's ass about profit. What we care about is free cash flow. That's all that matters to us.
I can show you profitable companies that the next year were in a crater wondering how they turned out the light so fast.
The question is, do you have, once you have paid all your bills, all up here, okay, then you ask yourself,
one, can I pay a dividend? Well, first of all, can I pay my interest expense?
That's why we don't look at interest expense when we're calculating free cash flow. That's one of the things that free cash flow provides.
Can you pay your interest expense? Second, can you pay dividends to shut your shareholders up and keep Wall Street fund managers and the pension funds happy?
A third one is, can we afford new property, plant and equipment without financing it? That's the third question.
And there are other questions. How generous can we be with bonuses? How generous can we be with taking care of our workers?
All of those questions are after you get to free cash flow. If free cash flow is positive, you can do a lot of things.
If free cash flow is negative, well you've got to find someone who's going to give you the money that you couldn't earn yourselves.
And sometimes that is going to be very dirty money. That is exactly why you'll see Elon Musk standing behind a bunch of Arabs being their concubine.
It's because Tesla was for years negative free cash flow. He had to go to some of the nastiest resources on earth to get his money.
We don't want to do that. In a business, we don't want to be compromised. That means keep free cash flow positive, never mind what's going on with the net profit.
If the talking heads on TV say, well this is not a buy because their profit fell so much, so what?
If it's fundamentally a strong company, if its intrinsic value is not the present value of future expected profits,
the intrinsic value of the company is the present value of future expected cash flows, period.
We don't even talk about profit when we're doing the intrinsic value of the company. We're way past that.
So that's something to keep in mind when we're looking at these statements. Quickly, now just a quick snapshot look over here.
Look at their cash position. Where do you see cash? What happened to cash?
Where do you see? Just tell me. Anything? You see anything with cash?
It's lower than the 2024 version.
Well, the 2023, in other words, their cash position has expanded massively.
It was like my stomach when I started liking food again. That means liquidity. They've really upped their liquidity.
The question is, first of all, liquidity is great because then you can pay your bills in a timely manner.
Liquidity is not good because if it's a liquid asset, then it's not earning hardly anything at all.
It's the long-term assets that earn for you, not cash. I've got money in my pocket.
I can buy Denny's tonight, Grand Slam, and a piece of apple pie a la mode. Am I living the dream? Yes, I am.
However, all this cash in my pocket, I could have put that into a damn stock.
I could have bought call options on a stock or something like that. So I can't earn money if I'm keeping it in cash.
That's the problem. Liquidity has a double edge to it.
On the one hand, you need sufficient liquidity to be able to cover your bills in a timely manner.
On the other hand, too much liquidity means the opportunity cost of that money in cash is what you could have made in a long-term investment with it.
That's the question I would have here. Why the F? They nearly more than doubled their liquidity, their cash position.
They're not stupid. So the next question we ask as financial analysts is the very deep philosophical question, WTF.
Why are they doing this? What's going on here? We hope there's some method in their madness.
But there's a problem with targets' balance sheet.
Look at the current piece of the balance sheet on the asset side. What's missing?
Come on, you accountants. What's missing there?
Yeah, it's not there. Target doesn't extend credit? Like hell they don't.
Why are they doing that? I mean legally, by the SEC's rules, you have to disclose every line and yet here they are not doing it.
Well, there's where it gets a little bit interesting.
You have to dig and you find out that Target is using what's called a captive to own the accounts receivable.
That way they don't have to report it here on their balance sheet.
They disclose it in the 10K manifest. It's there. But here I don't see it. It's just not there.
And that's bad news for analysis because, remember, accounts receivable is technically your revenue is your cash sales plus those receivables.
But the receivables tell us how much of that didn't show up as cash.
So our question is, what are those accounts receivable? Are they big?
That would mean that that revenue on the income statement isn't a true reflection of the cash that's available.
That's a problem. Are they hiding it or is this just some genius thing they did?
Honestly, I haven't found another company that hides its accounts receivable in a captive.
And there might be a very sound financial reason for it called securitization.
They might be using a captive so they can efficiently securitize their accounts receivable.
I don't know, though. I just don't know. But I'll tell you right now, that's a major hole in our ability to analyze this company.
That accounts receivable missing from there. That's enough for today. I'm going to let you go and we'll keep this going on Thursday.
That's all I have for you. I thank you.