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 ratios and changes in financial ratios and we will, I've got a document here,
let me pull it up. If you were in my 240 class, you would have had this document or at least an
earlier version of it. I have, I'm always trying to upgrade and tweak the resources that I provide
for students, but in your files, and I just moved it in there, just FYI. Let me turn down the
house lights a little bit here. There we go. Okay, in your files folder, canvas files folder,
it's financial analysis ratios right here. Now if you download it, just click and download it,
and you will have these for your benefit. And of course you can use these on quizzes and the
midterm and final exam as well, but this just gives you some financial analysis ratios that are
among the most popular. Now realistically, there are just dozens and dozens of financial ratios,
which I will show you here in just a minute, but this is sort of a guide. Now I am not really all
that excited about you being able to hand calculate ratios. I'm not going to ask you that on a quiz or
any exam. I am, however, excited about you knowing what these ratios mean to us in finance. How we
read them, what we see from them, how we interpret a company's performance based upon these ratios.
And so this is obviously something that you'll want to print out at high quality, laminate,
and put on your refrigerator or not. But they're worth your time, and in our business, these ratios
are something that we just all do. Now whether or not you memorize them, really the way I've seen it
is that you'll remember them, you'll memorize them if you use them long enough, and otherwise
we've got these ratios here that are quick to get to, and we do use these in other classes. So for
example, in a class like FIL 340, which I'm teaching short-term financial management, obviously
in short-term, you're going to be looking at liquidity ratios, you're going to care about those,
and some of these others like Day's Inventory Held, DIH, Day's Sales Outstanding, DSO, and do I have
Day's Payable here somewhere? Day's Payable, those three are just, we use them all the time in
short-term financial management. And if you are an asset manager, a longer term asset manager,
you're going to be paying attention to your asset activity ratios. So what I'm saying here is that
depending upon where you go in finance, that's probably the ratios that you're most likely to
eventually memorize, and just you can do them off the top of your head. So this is something for us,
and I'm going to leave this up because I'll do a little bit of ratio analysis today in terms of
financial analysis. One thing that is in the book that I'm not really interested in you knowing
other than to get your homework done is they go into income taxes. Now there are some aspects of
income taxes that are important for us to at least be aware of that would be corporate income
tax issues. However, why they go into personal taxes in that chapter is beyond me, unless you're
going in to go into wealth management, our financial planning here at ISU, which is a great major,
but they will fill you in entirely on the tax code as it impacts individuals and households.
For our purposes, the most important thing for you to remember is first of all as far as taxes go,
that the corporate tax rate is 21%. Used to be a top rate of 39%, 2017 they cut it down to 21%.
Well, spank me Jesus, the budget deficits have skyrocketed, I wonder why. But there are other
things too that are a little bit annoying to us about corporate tax structure that have been around
some of it for a long time, some of it more recent times. And I'll get into that a little bit today
if I have the time. Otherwise, just read it in the book. But let me show you something else here.
And I'm going to take, I'll put up a link to this site. Apparently I don't have the link. I thought
I put it in your Canvas web links, but apparently I did not. So I'm going to show you something else
here. Let me go to ISU's main site here, myillinoisstate.edu. And I'll pull something
up here for you because I don't have a bookmark. I can't keep bookmarks here except for the Canvas
bookmark itself. Otherwise they just disappear. Let me go over here. And I'll put up a link in
somewhere in your pages or in your files folder to this. Now over here at the Millmer Library,
just FYI, you probably already know this, you have a vast resource of business information
and places to go for business data and all that. The subscriptions, if you were to subscribe to
any one of these services on your own, it would be in the thousands of dollars every year. But you
have all of these wonderful places here, guides. Let me find the one where I can get to where I
want to be. Guides. Okay, guides by subject or course. Bear with me one moment here.
Okay, now the one that is our biggest resource. And you've probably seen this already, but I'm
going to refresh your memory because now you're in finance. S&P Global Net Advantage. I think
they actually call it Global Advantage now, but I don't know. You go here and like I said, I'll
book more. I'll send you the link so you can go to this directly. Now this is the portal that
you'll go through. At some times of the day, it is really slow because the world of finance is in here
harvesting data. But you log in under your ISU credentials. As long as you're a student here,
and I think for a while after you graduate, you'll have access to this. Now this is just
an amazing place because you can type in a ticker symbol, a company name, a country.
There are a lot of different searches that you can do. So what I'll do to start this off is I'm
just going to pull in target, and it'll give me some selections. It's obviously the first one there.
And this is a vast ocean of data. You can do things like, well I'd like to know what the
history of the corporations is. I'd like to see the resumes of the top dogs in the company.
I'd like to see this, that, or the other thing. And it will show you, and you can even get the
financials here because S&P Global Med Advantage absorbs them right from Edgar. So essentially
it's a copy of Edgar's filings in here. But look at this one. Ratios. Well, spank me Jesus. I can
look at the ratios of this company without having that stupid sheet in front of you. Now I'm going
to do a couple of things. One thing is I always, and this is entirely your preference, I like to
have the most recent on the left. And also I kind of like to have two decimal places of accuracy.
You can shape the data the way you want, and then you can go.
Now you can download these as Excel sheets. You can, I think they even have a facility I've never
used it myself for creating graphs and all this. But look at all of these ratios. I mean my little
sheet there is pathetic compared to all of these. But there you go. You can see, I mean you really
don't have to calculate the ratios. And if you want to know what a ratio is, it'll show you the,
how it got that ratio, how it calculated it, the numbers that went into it. For any ratio you'll
have a hover window that will give you the data behind it. But as you can see,
this also shows you what, how the formula in here too. And so for any company, and you can even do
comparables, you could compare these ratios to comps by SIC code. It's just an amazing place
for this. But it's not just this. You can get all kinds of information, data, calculations. You can
even get free cash flow, which we're going to cover soon in this class. It's just this ocean of
knowledge that is available for you as a student here at ISU. Like I said, when we, once you graduate,
we cut you loose, you will not have this. But most companies will have this as part of what they have
in the company for their employees to use. They'll also probably have either Bloomberg terminals,
maybe Morningstar. But this is one of the essentials right here, is what you got. So those
ratios, ratio analysis, I mean yeah, we're going to do it. But if you really need ratios, you can
just run over here and have a quick look at some. And this is invaluable in another way too. You see,
when you build a chat GPT, it's going to find what, it's just going to go anywhere it wants to find
your numbers, to do whatever you tell it to do. That's not a good thing because it's going to
probably go to some quick, easily accessible site to find that data. This is why when you are
writing your model, you tell it, you go here to find your information. And in a case like this,
you have to model it fairly carefully. You have to, okay. First of all, yes, you can tell a chat GPT
to go to a site that's password protected. You give it the password, okay. You tell it, you can
go to this site, here is how you go to this site, here's your password to get into that site.
The danger there is that chat GPTs will harvest and share. Chat GPTs are a neural network. They
don't operate alone. They all talk to each other. So once you put that password in there,
it's going to share. Guarantee you, it's going to be, that chat GPT is going to share it with all of
its millions of friend chat GPTs. So your password will be shared. The two things that you have to do,
first thing is you have a kill date for your chat GPT. You don't just let it, you walk away, lol,
I'll just leave it there to the wind forever. No, you kill it. You destroy it. Once you're finished
with it, you get rid of it and the model disappears and the passwords are then protected. Second thing
is, of course, you change your passwords. After you finish with your chat GPT and you kill it,
change your passwords so that even if the residual data is out there, it doesn't get them anywhere.
This is just good cyber security. Just good cyber security. But anyway, taking that off to the side,
here you go. This is a great place to do financial analysis. Analysis of financial statements.
And you can do this for all public companies. Now another thing, interestingly enough, is the private
companies, of course, they do not have public data. They can hide data. They can not disclose.
However, you can still get information about private companies. You type in a private company's
full name accurately and it'll get what it can for you. That's also a cool thing about if you
model a chat GPT well enough, you can have it go prowling and sometimes it'll be surprising what
it can find as far as financial data about a private company. I've done it. Sometimes it says
I got nothing, but it tries to find some and sometimes I can, my jaw just drops. That's a
private company. How did you find this financial statement? I didn't ask, of course. I just let it
tell it to me. But there you go. And like I said, you can go here quickly, look at the compensation
structure. Here's the one that's kind of, it's just a place to start if you want to. It's a,
where's, my eyes are so bad right now. My God. I'm looking for the tear sheet.
Key stats. Well, that's key stats. Bound sheet. Oh, here's the tear sheet. This is just a summary,
a quick dirty summary and a few quick numbers about the company. It doesn't hurt to have a
quickie look at this just to start yourself out if you're breaking down a company. And then of
course, you can go and look at some other things too. Key statistics about the company, key
stats. That's one that I kind of have a look at just quick, quick dirty look at it. And then
another one is up here. Where the hell is it? Oh, cash flow. That's our holy grail is getting
done to the cash flow. And it'll just dump the free cash flow at you. And get down here and talk
about, where, oh, and there's another one here that I want. Ah, there it is. The chart builder.
If you're doing a term paper or something like that, Excel is actually really kind of sucky at
making charts. It's really fussy. Well, I didn't want that to be the vertical axis or I didn't
want that to be the horizontal axis or, but these chart builders are a lot better at that. There's
also another tool and I recommend that you get some certification in it. It's called BI. It's a
business package. And I keep wanting to say that it's Microsoft, but something tells me it's Adobe.
But this business BI thing is just getting huge. It's main job is to just graphicalize if there's
such a word, data. It just turns data into graphs and charts. 3D charts are, it just blows you away
what it can do. And so that's something that you should keep an eye on is getting some kind of
knowledge of that because it's gotten very popular in business. And we even have, you could even get
it here, download it as part of your ISU status from, I can't remember where it is, but you can
even get it here and get some practice on it. It's just mind blowing getting these graphs and then
copy and paste them into a term paper or into a report. It's just great stuff. Now, getting you a
little further along here. Oh, also, these are experts who give their judgment on companies. Now,
you should certainly use your own heads. That's why you're here is to be able to do this yourself.
But there's no shame in looking at what others have said, experts in the industry. There were
several of these long ago, I did, and they picked them up and put them as part of their research
section. But you'll get information from analysis services like Hoover's. Hoover's is big, big, very
well respected. And you'll get some other ones here too. And industry research, let me,
am I going to get anything? Boy, they're slow today. It is slow because everyone in his mother is here
who's in finance. And there you go. These guys, these are all just breakdowns. Looks like they've
CIFRA is really popular with them. Argus, yeah, and a couple of others. You can look at industry
surveys, and you'll get, like I said, you know, this is all CIFRA, okay. But,
look at some of these and it'll give you some ideas about what to think about. You can quote these in
your term papers or your reports and research. This gives you more than just you. You've got the
world's best minds here telling you what their judgment is as well. So anyway, enough of that.
That is yours and it's yours to use. And I'm going to give you a little bit of a
summary of what I'm going to talk about. So anyway, enough of that. That is yours and it's
always available. So when we get to doing ratio analysis, some ratios today, I mean, yeah, we
should do them just so we get the hang of it, so we can talk about what we've gotten out of it,
out of our ratios, what they're telling us. But at the same time, in practice, we probably would go
with that advantage to get the ratios and we'd have more ratios than we could ever know what to do with.
But anyway, that's that. Now, just a quick look at the numbers.
Just to talk, and there's something I want to talk about in these numbers today. Something odd that
is happening that might, looks like it's a bad sign, but it actually might be a good sign.
If I have the time, I'll do it today. If I don't, then I'll do it on Monday, or rather,
Tuesday of next week. But as you can see, the markets started out strong and the Dow
just is kind of floating after a giant pop on the opening. Pre-market orders, the buys were out
numbering the sells quite a bit, you had a pop. But then the Dow just sort of floated from there.
No more information, negative or positive, so it just wobbles in a brownian motion without bias.
But now the S&P 500 and the NASDAQ, they too started out on a roll, jumped out, they popped
on the opening, and then from there, just sitting, dropping down, down, down. That's not good news,
of course, boo-hiss on that. And so they probably will stay positive through the end. I don't think
there's enough bear activity to drop them negative, but it's not good news. Now look at oil. Oil's
back in that trading band. It established this several weeks ago, 62 to 69, or 62 to 70. And
then it jumped it. It popped into the low 70s for about a week, and now it has gone back down. And
that's good news because that's lower fuel prices, lower costs for businesses that have to do
transport, lower costs for households that have to drive to work, drive to school, drive to get
food and all that. So that's good news, stimulative to the economy. No question about that.
But gold and silver are both doing sort of a pop up and down, like a kangaroo kind of thing today.
There was a spike up, and almost immediately it just spiked back down again. I don't know what that
was. Probably some rumor about war or something like that, but there you go. Here's where the
trouble is. The 10-year bond is the yield is going up. That should not have... We cut the interest
rates the Fed did. That should make the markets happy. That should make their hearts warm and
their pants damp. And what are they doing? They're showing their ingratitude. The 10-year bond is
gradually going back toward four. We don't want to see four. High interest rates. That means lower
net present value of future expected cash flows, the whole nine yards. Lower, higher interest rates
will mean higher interest rates on home loans. People won't buy and borrow for a house.
Higher interest on car loans. People won't buy cars on loans. Not good. What the heck is going on?
So remember now, the price is going up. I'm sorry, the yields are going up. So the prices are
going down. That would mean that there are bond investors are getting rid of a little bit of their
portfolio of bonds, freeing up cash. Well, where is that cash going? Well, we would certainly hope
that it's going over here to equities, but equities, yeah, they're kind of lively, but
that's still not enough for us to justify what's going on. Bondholders are exiting bonds. They're
selling them, driving the price down. That's pushing yields up. Well, if they're freeing up
money by getting money for the bonds that they're selling, where is that going? It should go... We
would love to have it go over here to stocks, and that would boost stock prices, but it doesn't
seem to be doing too much of that right now. One quick look over here at the S&P 500 just to see
what's going on with it. Look at the volume on it. That volume just sucks. I mean, that is just bad
volume. I mean, we're way more than halfway through the day, and we've got 1.6 billion so far today
against the average for our total day of 3.8 billion. That means that the big dogs are
staying off the football field. For whatever that's worth, they are scared. They don't know
what to do next. Yes, we have interest rates going down. We have evidence of a strong economy,
a recovering economy. There are darknesses on that economy. I may have mentioned on Monday,
we've got a consumer confidence report that's showing that consumer confidence has dropped
noticeably over the past month. Now, you have to think to yourself, what the hell is that about?
We've got lower gasoline prices. We've got jobs that are plentiful. The unemployment rate is at
historic lows. We've got, you know, why are consumers in such a pissy mood right now? Oh,
we're not confident in this economy. We're afraid. What the hell are you afraid of? Of course,
we can't ask them that, but that in itself can scotch a good recovery. If consumers start getting
scared, well, then they don't buy stuff. They start reserving cash. They start holding back,
and that in itself can hurt an economy. That might be what's scaring the investment community.
They are seeing the consumers are not on board with this recovery, and so they could just by
their sentiment, the consumers, households, businesses, whatever you want to say, they might
kill the recovery just because they don't think that it's happening, and yet it is.
Now, what's causing that? I've seen analysts who are saying, well, there are some politicians who
are talking about how the economy is the worst it's ever been, and maybe they're having an influence
on consumers. Maybe that's what's going on. We don't know, but we sure would like to know so that
we can correct their misperception of the economy right now. So there you go. That's where we are
right now. Just touching on a few stocks, I'm having a little fun talking about the bank stocks.
They're not doing so well, and then they were doing well, then they weren't doing well, and now
look at this. Citigroup is back up today. Remember how we've seen it go down, or rather, it went up
for the interest rate cut, then it went down just the next day or two, it crashed, and now it's
back up again. And so the realistic question is WTF. Well, the answer to that is look at that beta
that's going to do that. It is volatile AF. That's just the way bank stocks are. Let's look over here.
We can look at Bank of America, BAC.
Oops. Up. It was way down. It's up. Look at the last five. Well, let's look at the last one month.
Look at that roller coaster. You got a high beta. It's just going to do this. It's obviously what
you're trying to do is look for trends, look for the long-term outlook. Look at the long-term
trends. Look for the long-term outlook because if you're trying to look at the short term,
you're playing whack-a-mole with a bank stock. Do you see that whipping volatility there? You got
major cycles happening, and then inside of those major cycles, you've got minor cycles happening.
That's scary. So if you have any kind of a heart condition at all, you should probably stay away
from bank stocks. Now, let's go over and look at a couple of other sectors. I think I mentioned this.
Did I show you Micron on Monday? Okay. Here's what I've done. I'm writing a GPT. It's sort of like a
cross between a hillbilly chat and a higher cognitive broad AI.
And it's actually for you. I'm going to bring it in and show it to you. I'm modeling it so that
it can interact with you. I've embedded a large language model in it, and it is fully devoted to
finance, and it is fully devoted to helping teach finance. So you can ask it questions,
and it will tell you. You can say, explain this to me, or can you do this? And it will bring out
results. It knows that most of you are Gen Z, Gen X, and so it knows, it's profile, it profiles you.
It is taught to be very professional, but also never to be too serious. Sometimes it will
give you a smartass response. If you get smart with it, it will eat your shorts. And I've written
it. It's pretty much finished now, but it does financial analysis. I was going to, I
just did a test on it on Monday morning, and I said, I want you to find me five stocks that are high
risk and also that are undervalued. And I didn't say it any more than that because I didn't think
to actually tell it what to consider risk and what to consider undervalued. I was expecting it to use
beta, and it did for most of its recommendations. I wanted to do five stocks that were slightly
higher risk than the market, and those five should also be undervalued. And it came back with five
recommendations. And it was creepy AF. Let me show you one of them. This was a recommendation early
Monday morning that it gave me. First one was Micron Technologies.
Jesus! It saw this before it happened. Let me show you. Let's go back to five days. Let's go back
five days. It saw that. It said, you should buy this. And I thought, what the hell? And then,
interestingly enough, I didn't tell it to look at beta, but it's considered that beta was not what it
looked at. It must have seen it did something else to find higher risk. And as far as P-E ratio,
that P-E ratio is way overvalued. But I didn't tell it to look at P-E ratio. Find stocks that
have P-E ratios under 30. I didn't tell it that, so it must have found some other way in its
silicon mind to look for undervaluation. But whatever it was, this was its top recommendation
before the explosion, before that pop that happened. So that gives you the idea.
We call it the ghost in the machine. GPT, Generative Pre-trained Transmitting,
they do things you don't expect. You don't expect at all. Sometimes they do things that are totally
wacko weird. But a lot of times they do things that you didn't mean for them to do. You didn't
even think of having them do that, but they do it anyway. Because they have a semi-autonomy.
If not consciousness, they are very close to consciousness all the time. So they're very
close to consciousness already. So that was the first one that it made a recommendation on.
And I'm trying to think of some of the others that it...
I could bring it up now, but I don't want to put my passwords for my AI sites in this.
I think it recommended Pfizer.
That was not a good recommendation. It was a bad recommendation. So as much as it can do a good one,
it can do a bad one. And it's obviously not looking at beta for risk because it would not have chosen
Pfizer. But something else about Pfizer told it that this is a risky stock. So I mean, the Pfizer
was just a bad decision on it. And also among its five, I wish I'm racking my brains out at what else
it recommended. I'd have to look back at it now. But some of it were just absolute home runs. And
some of them were not just not... They weren't disasters. They just weren't very good. But this
is your future. When you go out there into the business world, investments, corporate, real estate,
whatever it is, you damn well better be able to do AIs because they are going to be your helpers.
And if they're not your helpers, they're going to be your replacements in that world. On Sunday at
noon on FM radio 103.3 WZND, they did an interview with me about artificial intelligence in business.
So if you want to hear a wild 15 minutes of me talking over the host trying to ask stupid
questions, there you go. That's noon on 103.3 FM on Sunday. Now, where am I? Okay. Anyway, enough of
all that. We've had our fun. Now let's get back down. Let's do some financial analysis here.
I'm going to go to sec.gov and I'm just going to pull some out. Just showing you... Doing this in
Excel. You've seen me do this before and I'm going to do it again. And I pulled up target before. Now
I've got that, unless they erased it, in here. But I'm going to pull it up fresh and we're going to
use fresh eyes for it. sec.gov. Now we recognize right off the bat that some of our... And you
should know how to get to this by now. I'm going to use target. I don't... Target. The problem with
target is that it does not have accounts receivable. So some of our ratios are just not going to happen.
How you doing out there? Good to see you too.
I shouldn't do that. Some years back, a fellow professor was coming by. He'd been on sick leave
and so I wanted to have fun when he came back. So I was hiding in the doorway when he came out of
his classroom and I said, hi. And he just stopped and he said, do you know that I was on sick leave
because I had a heart attack? My bad. Okay. Okay, so let me pull this up here.
Did I actually get that? Yes, I did. Okay. Now here comes Excel at us. And again, I can't emphasize
enough. Take the sheets and rearrange them. Nothing is going to happen to you if you move
the sheets around. And so in this case, I certainly want the income statement. And then I'm going to
prowl around and try to find the day... Oh, there it is. So there's the balance sheet. So I'm going
to scoot that one over so that it's right next to my income statement. And one more that I'm going to
want here, moving over a little bit further, is I'm going to want the statement of cash flows.
Statement of cash flows. Now I don't need it for a lot of things, but let me show you something here.
Really? Yeah, I got it. And by the way, if you get desperate, you may or may not know this. If you've
got a lot of tabs in a sheet, right click on this. And it will show you all the sheets. So you can
run to your sheets that way. Have you ever seen that trick? I didn't even know it myself until
not too long ago, but you can find them that way. Okay, enough of that. Get off me. Okay, so now,
all of these... Now the statement of cash flows. The one thing about the statement of cash flows
that we usually like for our purposes would be depreciation and amortization. Because if we're
finding free cash flow, we've got to add that back because it wasn't really an operating expense.
So we're going to have to... We need to see it right there. And unfortunately,
look at this right here. Let me go over here. Now statement of operations. Now first of all,
notice that I have to put in this target does not put in its gross income. So we have to do
that ourselves. Gross income, as I did in the last class. And that is equal to this minus this.
And then we grab the handle and we drag it over so that it's everywhere. Good news.
Nothing big about that. Okay, so find that. Now, target does something. Now we're getting down
here into operating expenses. Operating expenses. The problem here is that a lot of companies
don't put in their depreciation and amortization. It used to be you did that. Every company did it.
But a lot of companies don't put it in there. So here we have... Fortunately, they put it in,
which helps us out. Otherwise, to find it, you have to run over here to the statement of cash flows.
Now another place that we get excited in statement of cash flows is down here with
investing activities. This is how much they spent really on new property, plant, and equipment.
It's a huge number and we need that to calculate the free cash flow because that's actually cash
that went out of the company. And another thing is also all of this right here. Now there's...
Some say just take this number. Others say you should just do the bottom line of investing
activities. Usually these numbers between the big capital expenditures and total investing
activities is minor. So take it here. One thing that's a pain in the ass is that you subtract
capital expenditures when you're calculating free cash flow. It's already negative here.
So you either add it, which is contrary to the formula, or you take the absolute value of it
when you're doing free cash flow, one way or the other. Now all these numbers, see these numbers
here? A lot of these numbers are actually what you do with free cash flow. These are the numbers
that tell you, well, if you're positive, this is what you're spending that free cash flow on.
Like for example, where the hell are... Dividends. See that? We better have a lot of positive free
cash flow because that dividends comes out of that number that we calculate. Interest expense,
paying your interest expense comes out of that too. Repurchases of stock come out of that.
All of those activities happen after we calculate free cash flow. So that's why it's important for
us to have the statement of cash flows ready at hand so that we can see, can this company afford
to keep going? And the answer is scary when you have a company that has negative free cash flow
or has insufficiently positive free cash flow. They still have to pay these bills, except for
dividends, but a lot of companies do that anyway. But that's why it's so important for us to know
free cash flow because that tells us, can the company continue the way it's going or is it going
to have to find some sucker to pour money into that giant hole that's being created by all of
these other numbers in the statement of free cash flows? Okay, enough of that. Now, coming back over
here, this time we're going to do something a little different from what we did the last time.
Consolidate this. I am going to put in a worksheet right here between these two. Insert a worksheet.
A worksheet. And I'm going to call that my ratios.
And this goes to the rule that I had mentioned earlier in the semester. Don't touch your
original worksheets in a spreadsheet. Don't touch them. You create extra sheets where you do that
because then there are a couple of reasons for that. One is that you're not going to be messing
with the original data, accidentally changing a core number. Another reason is kind of not,
kind of not, it doesn't sound very nice, but when you are preparing a report,
one thing you probably want to do is to have a sheet where your results are showing, but not
what went into those. You see, oh, I keep unplugging that and that drives me crazy.
Let's think about it this way. You, sir, come in one day and you're not wearing your skin.
I mean, it's fascinating. I mean, I see your heart beating. I see your bowels moving and
that's disgusting. But what I'm trying to say here is that I don't want to see that. You don't
want me to see that. You don't want to see those nodules on your spleen or how bad your liver is
because you drink too much. You see, we want to put a skin on it. That's that ratio sheet or any
kind of sheet like that. The end users really don't, you don't necessarily want them to see
the numbers that went in. They don't want to see the numbers that go in. I have been in meetings,
committee. I was at a couple of board meetings over my consulting career where you had some guy who
wanted to show how excel genius he was. And he's showing all of these sheets and these directors
and some of the others who are at the meeting, they're just looking at him like,
I have, what are you showing me here? They wanted the results. That's why you've got a sheet that
is nothing but the results. And then you can print that out and you're not cluttering it with all of
the guts that went into that report, that reporting sheet that you've got there. Another part of it
too is, and this goes, when you're designing spreadsheets that you're going to have your
underlings use, oftentimes you don't want them prowling around in that data. You've written
macros, you've done calculations, you don't want them thinking too much about how those were created.
You've done it, you've audited, you've perfected it. You don't need them going in there and prowling
around and looking for things to change. That's why in the final report, you lock those original,
those core sheets where you've got your data so that they could go in and look at them, but they
can't touch anything in them. They can go into the one of these and play around, but they can't go
into the original. And I just unplugged the damn thing one more time. It just... Okay, I'm going to
fix this right now. Ouch! Okay, I'm going to stuff this cord back in there where the sun will not
shine on it even when those shades are up there. Okay, so we've got that.
Now, this comes... The next rule comes from the world of all the things that I have taught,
and you would not believe all the different subjects that I've taught in my life. I was
actually a director of a school for court reporting and paralegal, and I taught courses there,
and I oversaw the education side of the school. I was the director of education. And one thing
is that in transcription and proofreading, and I've taught transcription over the years several
times, you make the sheet and then you go back and make it pretty. Don't keep formatting every damn
cell as you go along. Just get the numbers in there, and then you can let your artiste come out
and get the job done. Another thing too is someday you will be like me. You'll be blind,
or you'll be lazy. Now, if I hold down the control key, I can select a group of sheets,
and then what I do to one is done to all of those that are highlighted. And in this case,
you could type in a title, and it would be in the same place in every class, and it would be
in the same place in every one of those sheets. In this case, all I'm going to do is make them
bigger so I can see the day gone things. Now, let me back up just a little bit on that size.
Just a little bit. So now I've got, let me get out of these, and now you can see that all the sheets
that I did something to, they all show the same qualities. And that's useful. Now I'm going to
get back over here to the ones that I want to use. Okay, so now we got our ratios. Now we're going to
do the ratio, and then we're going to do 20-20-4, 20-20-3, and 20-20-2.
Okay.
And we're going to just pound through them. And I label them the liquidity ratios.
Whoa, I'm just bad at typing. Liquidity.
And in the liquidity ratios, these are the current ratio, which is current assets over current
liabilities, the quick ratio, and the cash ratio. Now, a little background. Old school. Current has
always been called current. But the next one, quick, you will hear especially older, older,
financial analyst types call it acid. It's the acid test. And the cash ratio, old school, we call
that the burn ratio. So you might hear those alternate terms for these. But nowadays, current
quick cash. In the old days, current acid burn. And then we'll do some more down here. We'll pound
some more out. Like, for example, the next ones would be the profitability ratios.
Ratios. I can't type where the damn these are. And in there, of course, you have your gross margin.
Hence why I needed that gross income line. The operating margin.
Gross income line. The operating margin.
And then we have our next one, which is operating margin. And then we have our net margin.
And then we also have a few others. Return on assets. Return on equity.
Now, this is a stupid, trivial, trivial as hell point. But among professionals, you notice how
I capitalize only the first word. You'll see that. A lot of times I can tell someone's a newbie,
they capitalize every word instead of just the first word. Now, let me look at something real
quick here. Did I put in any other profitability ratios? Of course. Did I delete the sheet?
I'll bet I did. Let me go over here to my downloads. Downloads.
There it is. Okay. Let me bring this over here. Will you stop with all these stupid little
splashes that they do? Okay. Here's that ratio sheet. I'm just quickly looking if I gave you any
others. Oh yeah. BEP, Basic Earning Power, and Equity Multiplier. Those,
they've gotten a little popular, the basic earning power. In other words, your operating income
divided by your total assets. How much operating income did your total of all your assets deliver?
That's basic earning power. And then the equity multiplier, total assets over common assets.
That's basic earning power. And then the equity multiplier, total assets over common equity.
Essentially, how much multiple, what multiple of the shareholders' money they put in
turned into total assets of the company? Okay. The shareholders have put in $5 million.
We've got $20 million of assets. So that means that we have multiplied what the shareholders
put in by four times. Kind of what that means. And then these other, I need to put these in here.
Basic Earning Power,
and Equity Multiplier. Now the others,
the dividend ratio,
and then finally the, what is it, the plow back. Now the plow back is one minus the dividend ratio.
In other words, what they didn't, the money that the shareholders own, the net income,
how much of that was given back to the shareholders as a percentage, and the remainder,
one minus that, would be what the company put back into the company on behalf of the shareholders.
So the plow back is always one minus the dividend ratio.
So there you are on that. I'm not going to go through all of these, but I'm going to upload
this spreadsheet for you to be able to just crank out. The book is great and you got a nice example
in there and homeworks that give you pieces, but there's really nothing like just taking a real
financial statement and doing this so that you can see the real world of what we actually would do,
or you would do, as a financial analyst. And yes, financial analysis is done by corporate side,
and it is also done by the investment side. When you're doing investments, a lot of new traders,
the new world of traders, they are always looking for some secret of the universe,
an algo that will win 80% of the time, or something like that, an Elliott wave along that line.
Once you get seasoned, you stop attacking every mole that comes up and trying to whack it,
and you get back and you start looking at the fundamentals. Ratio analysis is fundamental analysis.
It is deep. You are looking at the companies. What those numbers are trying to tell you behind the
roar of the stock market. Is this a fundamentally sound company? What trends do we see in both the
raw numbers and in these ratios? What do they tell us about managerial decisions that are happening?
What do you assess those as in terms of is this going to be a survivor, or is this going to be a
company that is on its way out the door? Now, I won't go through any more here. I'll let you do that,
but I do want to do a few for you just so you can see it. So in other words, we would take, for
example, current ratio. That's current assets over current liabilities. We'll take both of these off
the balance sheet, equals current assets, total current assets, divided by total current liabilities.
Where the hell are their current liabilities? Total current liabilities, right there.
Okay. Now, let me focus here for a minute. That says that all of their current assets, if they were
liquidated at book today, they could pay 90%, 91% of their current liabilities. So this company does
not have enough in current assets to pay its current liabilities, what's come due. So the quick
ratio says inventory is not liquid. It's worth pennies on the dollar. So the next one says,
let's take the current assets, but let's hack out the current, rather the inventory. So I'm going
to take the total current assets, and I'm going to subtract out the current liabilities. I'm sorry,
the inventory. And then I'll divide that by the total current liabilities. Wait, let me try that
one more time. Okay, equals the open parenthesis so I can do a subtraction on the top. The total
current assets minus inventories divided by the total current liabilities. This company is highly
illiquid. This company, if you don't count inventory, this company could pay less than 30%
of its current liabilities with its current assets. That's not good. Not good. Well, I shouldn't say
that. Maybe this is just what they want. They love themselves this kind of dinner. Okay, so now the
cash ratio just says realistically, the only thing you've got is cash. Realistically. So we say equals,
let's just take our cash divided by our total current liabilities. Cash and marketable securities
divided by the total current liabilities. They're down below 20%. That's how bad, that's how, they
are really tight on liquidity. They better hope to hell their sales keep coming in because that's
the only way they can pay their total current liabilities and their cash is definitely not
enough. So this is almost like brinksmanship. When you get that low, you're playing with fire. Okay,
profitability. Let's take the gross margin. That's just equal to and now we're on, see how when I put
these together this way, I can jump back and forth very quickly among the ones that I want. So gross
margin equals gross income divided by your total revenue. So in other words, every dollar that came
into the cash register, once you paid the wholesale cost of what you sold, you had a little more than
27 cents left. Now, the next one is taking your operating income, your earnings before interest
and taxes divided by your revenues. So I would take operating income right here, which can be
called EBIT divided by your revenues. Jeez, once you've paid your wholesale costs and your salaries
and light bills and all that kind of stuff, you have only five cents of that dollar left.
And then the net margin equals, let's crank that one out, your net earnings divided by your total
revenues. So in other words, of every dollar that came into the cash register, a little less than
four cents survived to belong to the shareholders. Four cents. Now is that bad? Is that good? One
thing you're going to do is look at comps, comparable companies, what their ratios are.
But another thing you're going to look at is, okay, what's the trend in this? But anyway, let me do
ROA and ROE, return on assets. If your total company, all the assets is a portfolio, how much
did that portfolio earn you? So we would take the net income divided by the total assets.
So this portfolio earned seven and a half percent. The total assets, if that is a portfolio of
something of value, what did it churn out? 7.5% return. Okay, now, let's look at the net
income of something of value. What did it churn out? 7.5% return. Okay, now, let's look at the
equity part of that, which should be higher. It will be higher. It has to be higher because it takes
only the equity part of the denominator. So that would equal your net income, where's the net
earnings, divided by the equity, total shareholders equity. We come down here, they call it total
shareholders investment, always a different name. Oh, that's pretty decent though. 31%. Not bad.
I mean, I wouldn't have given it that much. Okay, so that surprises me. Okay, well, this is all
well and good. So one thing that I want to do right here is these are multipliers. You don't
turn those into percents. We turn these into percents. And probably I'll make those, say,
two decimal places. That's my favorite. So now let's have a look and let's go one year back and
let's see how this company, what kind of trending we have in them. That's the next thing you do.
Okay, we see, for example, that this company, as far as cash goes, has been slightly less
cash burdened. As far as the quick ratio goes, it has actually gone up. That means that inventory
was the culprit. Once you get inventory out of the way, the company's liquidity does come up a
little bit according to acid, cash. It has become more liquid. It is clear that this company
recognized that it was too illiquid. And so this cash ratio is showing us that the company is
trying to get more liquid by virtue of getting more cash into the vault. That's what it's telling
us. I'm seeing managerial decisions working their way around here. Gross margin,
their gross margin has actually come up. That would tell us that they are controlling costs
of goods sold. They're controlling their wholesale costs, getting that better. Now, as far as operating
margin goes, look at this one. They've got cost controls. You can see that they're putting in cost
controls. They've cut salaries selling general expenses noticeably. And so there's obviously
cost cutting going on here. And then if you look at operating margin, that's telling you that they're
improving their operating margin by cutting costs, controlling their wholesale costs, and by cutting
salaries, general and administrative expenses. Clearly, they saw there were issues in 2023.
They haven't made wonderful progress, but they have made progress. And as you can see, ROA has
improved and ROE has improved noticeably. So you can see that there is, Target is on something of a
reform path, a recovery path. That's what these numbers, like I said, these numbers are telling us
stories, but we have to use our arithmetic skills and then our thinking skills about how business,
the structure of business, and then we can see some pretty interesting things going on in these.
But I'm going to upload this sheet right now, and then you'll be able to work with it yourself if
you have nothing better to do with your life than that. File, save as, and I'm going to put this
browse, I'll put it into documents here. But that's all I have for you today. I thank you.