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Alan Cring Productions in association with the Emergent Light Studio presents

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

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This is Business Finance, FIL 341 for autumn semester 2024.

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Today, financial ratios and changes in financial ratios and we will, I've got a document here,

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let me pull it up. If you were in my 240 class, you would have had this document or at least an

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earlier version of it. I have, I'm always trying to upgrade and tweak the resources that I provide

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for students, but in your files, and I just moved it in there, just FYI. Let me turn down the

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house lights a little bit here. There we go. Okay, in your files folder, canvas files folder,

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it's financial analysis ratios right here. Now if you download it, just click and download it,

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and you will have these for your benefit. And of course you can use these on quizzes and the

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midterm and final exam as well, but this just gives you some financial analysis ratios that are

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among the most popular. Now realistically, there are just dozens and dozens of financial ratios,

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which I will show you here in just a minute, but this is sort of a guide. Now I am not really all

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that excited about you being able to hand calculate ratios. I'm not going to ask you that on a quiz or

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any exam. I am, however, excited about you knowing what these ratios mean to us in finance. How we

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read them, what we see from them, how we interpret a company's performance based upon these ratios.

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And so this is obviously something that you'll want to print out at high quality, laminate,

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and put on your refrigerator or not. But they're worth your time, and in our business, these ratios

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are something that we just all do. Now whether or not you memorize them, really the way I've seen it

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is that you'll remember them, you'll memorize them if you use them long enough, and otherwise

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we've got these ratios here that are quick to get to, and we do use these in other classes. So for

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example, in a class like FIL 340, which I'm teaching short-term financial management, obviously

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in short-term, you're going to be looking at liquidity ratios, you're going to care about those,

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and some of these others like Day's Inventory Held, DIH, Day's Sales Outstanding, DSO, and do I have

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Day's Payable here somewhere? Day's Payable, those three are just, we use them all the time in

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short-term financial management. And if you are an asset manager, a longer term asset manager,

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you're going to be paying attention to your asset activity ratios. So what I'm saying here is that

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depending upon where you go in finance, that's probably the ratios that you're most likely to

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eventually memorize, and just you can do them off the top of your head. So this is something for us,

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and I'm going to leave this up because I'll do a little bit of ratio analysis today in terms of

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financial analysis. One thing that is in the book that I'm not really interested in you knowing

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other than to get your homework done is they go into income taxes. Now there are some aspects of

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income taxes that are important for us to at least be aware of that would be corporate income

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tax issues. However, why they go into personal taxes in that chapter is beyond me, unless you're

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going in to go into wealth management, our financial planning here at ISU, which is a great major,

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but they will fill you in entirely on the tax code as it impacts individuals and households.

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For our purposes, the most important thing for you to remember is first of all as far as taxes go,

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that the corporate tax rate is 21%. Used to be a top rate of 39%, 2017 they cut it down to 21%.

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Well, spank me Jesus, the budget deficits have skyrocketed, I wonder why. But there are other

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things too that are a little bit annoying to us about corporate tax structure that have been around

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some of it for a long time, some of it more recent times. And I'll get into that a little bit today

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if I have the time. Otherwise, just read it in the book. But let me show you something else here.

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And I'm going to take, I'll put up a link to this site. Apparently I don't have the link. I thought

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I put it in your Canvas web links, but apparently I did not. So I'm going to show you something else

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here. Let me go to ISU's main site here, myillinoisstate.edu. And I'll pull something

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up here for you because I don't have a bookmark. I can't keep bookmarks here except for the Canvas

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bookmark itself. Otherwise they just disappear. Let me go over here. And I'll put up a link in

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somewhere in your pages or in your files folder to this. Now over here at the Millmer Library,

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just FYI, you probably already know this, you have a vast resource of business information

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and places to go for business data and all that. The subscriptions, if you were to subscribe to

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any one of these services on your own, it would be in the thousands of dollars every year. But you

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have all of these wonderful places here, guides. Let me find the one where I can get to where I

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want to be. Guides. Okay, guides by subject or course. Bear with me one moment here.

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Okay, now the one that is our biggest resource. And you've probably seen this already, but I'm

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going to refresh your memory because now you're in finance. S&P Global Net Advantage. I think

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they actually call it Global Advantage now, but I don't know. You go here and like I said, I'll

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book more. I'll send you the link so you can go to this directly. Now this is the portal that

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you'll go through. At some times of the day, it is really slow because the world of finance is in here

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harvesting data. But you log in under your ISU credentials. As long as you're a student here,

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and I think for a while after you graduate, you'll have access to this. Now this is just

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an amazing place because you can type in a ticker symbol, a company name, a country.

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There are a lot of different searches that you can do. So what I'll do to start this off is I'm

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just going to pull in target, and it'll give me some selections. It's obviously the first one there.

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And this is a vast ocean of data. You can do things like, well I'd like to know what the

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history of the corporations is. I'd like to see the resumes of the top dogs in the company.

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I'd like to see this, that, or the other thing. And it will show you, and you can even get the

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financials here because S&P Global Med Advantage absorbs them right from Edgar. So essentially

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it's a copy of Edgar's filings in here. But look at this one. Ratios. Well, spank me Jesus. I can

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look at the ratios of this company without having that stupid sheet in front of you. Now I'm going

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to do a couple of things. One thing is I always, and this is entirely your preference, I like to

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have the most recent on the left. And also I kind of like to have two decimal places of accuracy.

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You can shape the data the way you want, and then you can go.

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Now you can download these as Excel sheets. You can, I think they even have a facility I've never

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used it myself for creating graphs and all this. But look at all of these ratios. I mean my little

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sheet there is pathetic compared to all of these. But there you go. You can see, I mean you really

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don't have to calculate the ratios. And if you want to know what a ratio is, it'll show you the,

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how it got that ratio, how it calculated it, the numbers that went into it. For any ratio you'll

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have a hover window that will give you the data behind it. But as you can see,

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this also shows you what, how the formula in here too. And so for any company, and you can even do

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comparables, you could compare these ratios to comps by SIC code. It's just an amazing place

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for this. But it's not just this. You can get all kinds of information, data, calculations. You can

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even get free cash flow, which we're going to cover soon in this class. It's just this ocean of

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knowledge that is available for you as a student here at ISU. Like I said, when we, once you graduate,

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we cut you loose, you will not have this. But most companies will have this as part of what they have

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in the company for their employees to use. They'll also probably have either Bloomberg terminals,

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maybe Morningstar. But this is one of the essentials right here, is what you got. So those

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ratios, ratio analysis, I mean yeah, we're going to do it. But if you really need ratios, you can

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just run over here and have a quick look at some. And this is invaluable in another way too. You see,

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when you build a chat GPT, it's going to find what, it's just going to go anywhere it wants to find

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your numbers, to do whatever you tell it to do. That's not a good thing because it's going to

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probably go to some quick, easily accessible site to find that data. This is why when you are

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writing your model, you tell it, you go here to find your information. And in a case like this,

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you have to model it fairly carefully. You have to, okay. First of all, yes, you can tell a chat GPT

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to go to a site that's password protected. You give it the password, okay. You tell it, you can

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go to this site, here is how you go to this site, here's your password to get into that site.

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The danger there is that chat GPTs will harvest and share. Chat GPTs are a neural network. They

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don't operate alone. They all talk to each other. So once you put that password in there,

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it's going to share. Guarantee you, it's going to be, that chat GPT is going to share it with all of

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its millions of friend chat GPTs. So your password will be shared. The two things that you have to do,

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first thing is you have a kill date for your chat GPT. You don't just let it, you walk away, lol,

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I'll just leave it there to the wind forever. No, you kill it. You destroy it. Once you're finished

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with it, you get rid of it and the model disappears and the passwords are then protected. Second thing

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is, of course, you change your passwords. After you finish with your chat GPT and you kill it,

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change your passwords so that even if the residual data is out there, it doesn't get them anywhere.

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This is just good cyber security. Just good cyber security. But anyway, taking that off to the side,

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here you go. This is a great place to do financial analysis. Analysis of financial statements.

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And you can do this for all public companies. Now another thing, interestingly enough, is the private

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companies, of course, they do not have public data. They can hide data. They can not disclose.

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However, you can still get information about private companies. You type in a private company's

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full name accurately and it'll get what it can for you. That's also a cool thing about if you

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model a chat GPT well enough, you can have it go prowling and sometimes it'll be surprising what

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it can find as far as financial data about a private company. I've done it. Sometimes it says

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I got nothing, but it tries to find some and sometimes I can, my jaw just drops. That's a

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private company. How did you find this financial statement? I didn't ask, of course. I just let it

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tell it to me. But there you go. And like I said, you can go here quickly, look at the compensation

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structure. Here's the one that's kind of, it's just a place to start if you want to. It's a,

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where's, my eyes are so bad right now. My God. I'm looking for the tear sheet.

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Key stats. Well, that's key stats. Bound sheet. Oh, here's the tear sheet. This is just a summary,

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a quick dirty summary and a few quick numbers about the company. It doesn't hurt to have a

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quickie look at this just to start yourself out if you're breaking down a company. And then of

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course, you can go and look at some other things too. Key statistics about the company, key

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stats. That's one that I kind of have a look at just quick, quick dirty look at it. And then

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another one is up here. Where the hell is it? Oh, cash flow. That's our holy grail is getting

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done to the cash flow. And it'll just dump the free cash flow at you. And get down here and talk

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about, where, oh, and there's another one here that I want. Ah, there it is. The chart builder.

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If you're doing a term paper or something like that, Excel is actually really kind of sucky at

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making charts. It's really fussy. Well, I didn't want that to be the vertical axis or I didn't

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want that to be the horizontal axis or, but these chart builders are a lot better at that. There's

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also another tool and I recommend that you get some certification in it. It's called BI. It's a

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business package. And I keep wanting to say that it's Microsoft, but something tells me it's Adobe.

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But this business BI thing is just getting huge. It's main job is to just graphicalize if there's

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such a word, data. It just turns data into graphs and charts. 3D charts are, it just blows you away

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what it can do. And so that's something that you should keep an eye on is getting some kind of

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knowledge of that because it's gotten very popular in business. And we even have, you could even get

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it here, download it as part of your ISU status from, I can't remember where it is, but you can

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even get it here and get some practice on it. It's just mind blowing getting these graphs and then

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copy and paste them into a term paper or into a report. It's just great stuff. Now, getting you a

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little further along here. Oh, also, these are experts who give their judgment on companies. Now,

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you should certainly use your own heads. That's why you're here is to be able to do this yourself.

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But there's no shame in looking at what others have said, experts in the industry. There were

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several of these long ago, I did, and they picked them up and put them as part of their research

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section. But you'll get information from analysis services like Hoover's. Hoover's is big, big, very

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well respected. And you'll get some other ones here too. And industry research, let me,

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am I going to get anything? Boy, they're slow today. It is slow because everyone in his mother is here

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who's in finance. And there you go. These guys, these are all just breakdowns. Looks like they've

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CIFRA is really popular with them. Argus, yeah, and a couple of others. You can look at industry

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surveys, and you'll get, like I said, you know, this is all CIFRA, okay. But,

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look at some of these and it'll give you some ideas about what to think about. You can quote these in

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your term papers or your reports and research. This gives you more than just you. You've got the

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world's best minds here telling you what their judgment is as well. So anyway, enough of that.

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That is yours and it's yours to use. And I'm going to give you a little bit of a

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summary of what I'm going to talk about. So anyway, enough of that. That is yours and it's

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always available. So when we get to doing ratio analysis, some ratios today, I mean, yeah, we

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should do them just so we get the hang of it, so we can talk about what we've gotten out of it,

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out of our ratios, what they're telling us. But at the same time, in practice, we probably would go

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with that advantage to get the ratios and we'd have more ratios than we could ever know what to do with.

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But anyway, that's that. Now, just a quick look at the numbers.

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Just to talk, and there's something I want to talk about in these numbers today. Something odd that

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is happening that might, looks like it's a bad sign, but it actually might be a good sign.

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If I have the time, I'll do it today. If I don't, then I'll do it on Monday, or rather,

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Tuesday of next week. But as you can see, the markets started out strong and the Dow

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just is kind of floating after a giant pop on the opening. Pre-market orders, the buys were out

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numbering the sells quite a bit, you had a pop. But then the Dow just sort of floated from there.

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No more information, negative or positive, so it just wobbles in a brownian motion without bias.

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But now the S&P 500 and the NASDAQ, they too started out on a roll, jumped out, they popped

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on the opening, and then from there, just sitting, dropping down, down, down. That's not good news,

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of course, boo-hiss on that. And so they probably will stay positive through the end. I don't think

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there's enough bear activity to drop them negative, but it's not good news. Now look at oil. Oil's

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back in that trading band. It established this several weeks ago, 62 to 69, or 62 to 70. And

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then it jumped it. It popped into the low 70s for about a week, and now it has gone back down. And

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that's good news because that's lower fuel prices, lower costs for businesses that have to do

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transport, lower costs for households that have to drive to work, drive to school, drive to get

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food and all that. So that's good news, stimulative to the economy. No question about that.

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But gold and silver are both doing sort of a pop up and down, like a kangaroo kind of thing today.

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There was a spike up, and almost immediately it just spiked back down again. I don't know what that

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was. Probably some rumor about war or something like that, but there you go. Here's where the

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trouble is. The 10-year bond is the yield is going up. That should not have... We cut the interest

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rates the Fed did. That should make the markets happy. That should make their hearts warm and

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their pants damp. And what are they doing? They're showing their ingratitude. The 10-year bond is

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gradually going back toward four. We don't want to see four. High interest rates. That means lower

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net present value of future expected cash flows, the whole nine yards. Lower, higher interest rates

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will mean higher interest rates on home loans. People won't buy and borrow for a house.

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Higher interest on car loans. People won't buy cars on loans. Not good. What the heck is going on?

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So remember now, the price is going up. I'm sorry, the yields are going up. So the prices are

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going down. That would mean that there are bond investors are getting rid of a little bit of their

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portfolio of bonds, freeing up cash. Well, where is that cash going? Well, we would certainly hope

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that it's going over here to equities, but equities, yeah, they're kind of lively, but

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that's still not enough for us to justify what's going on. Bondholders are exiting bonds. They're

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selling them, driving the price down. That's pushing yields up. Well, if they're freeing up

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money by getting money for the bonds that they're selling, where is that going? It should go... We

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would love to have it go over here to stocks, and that would boost stock prices, but it doesn't

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seem to be doing too much of that right now. One quick look over here at the S&P 500 just to see

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what's going on with it. Look at the volume on it. That volume just sucks. I mean, that is just bad

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volume. I mean, we're way more than halfway through the day, and we've got 1.6 billion so far today

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against the average for our total day of 3.8 billion. That means that the big dogs are

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staying off the football field. For whatever that's worth, they are scared. They don't know

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what to do next. Yes, we have interest rates going down. We have evidence of a strong economy,

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a recovering economy. There are darknesses on that economy. I may have mentioned on Monday,

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we've got a consumer confidence report that's showing that consumer confidence has dropped

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noticeably over the past month. Now, you have to think to yourself, what the hell is that about?

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We've got lower gasoline prices. We've got jobs that are plentiful. The unemployment rate is at

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historic lows. We've got, you know, why are consumers in such a pissy mood right now? Oh,

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we're not confident in this economy. We're afraid. What the hell are you afraid of? Of course,

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we can't ask them that, but that in itself can scotch a good recovery. If consumers start getting

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scared, well, then they don't buy stuff. They start reserving cash. They start holding back,

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and that in itself can hurt an economy. That might be what's scaring the investment community.

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They are seeing the consumers are not on board with this recovery, and so they could just by

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their sentiment, the consumers, households, businesses, whatever you want to say, they might

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kill the recovery just because they don't think that it's happening, and yet it is.

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Now, what's causing that? I've seen analysts who are saying, well, there are some politicians who

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are talking about how the economy is the worst it's ever been, and maybe they're having an influence

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on consumers. Maybe that's what's going on. We don't know, but we sure would like to know so that

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we can correct their misperception of the economy right now. So there you go. That's where we are

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right now. Just touching on a few stocks, I'm having a little fun talking about the bank stocks.

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They're not doing so well, and then they were doing well, then they weren't doing well, and now

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look at this. Citigroup is back up today. Remember how we've seen it go down, or rather, it went up

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for the interest rate cut, then it went down just the next day or two, it crashed, and now it's

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back up again. And so the realistic question is WTF. Well, the answer to that is look at that beta

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that's going to do that. It is volatile AF. That's just the way bank stocks are. Let's look over here.

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We can look at Bank of America, BAC.

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Oops. Up. It was way down. It's up. Look at the last five. Well, let's look at the last one month.

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Look at that roller coaster. You got a high beta. It's just going to do this. It's obviously what

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you're trying to do is look for trends, look for the long-term outlook. Look at the long-term

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trends. Look for the long-term outlook because if you're trying to look at the short term,

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you're playing whack-a-mole with a bank stock. Do you see that whipping volatility there? You got

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major cycles happening, and then inside of those major cycles, you've got minor cycles happening.

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That's scary. So if you have any kind of a heart condition at all, you should probably stay away

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from bank stocks. Now, let's go over and look at a couple of other sectors. I think I mentioned this.

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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

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cross between a hillbilly chat and a higher cognitive broad AI.

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And it's actually for you. I'm going to bring it in and show it to you. I'm modeling it so that

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it can interact with you. I've embedded a large language model in it, and it is fully devoted to

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finance, and it is fully devoted to helping teach finance. So you can ask it questions,

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and it will tell you. You can say, explain this to me, or can you do this? And it will bring out

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results. It knows that most of you are Gen Z, Gen X, and so it knows, it's profile, it profiles you.

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It is taught to be very professional, but also never to be too serious. Sometimes it will

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give you a smartass response. If you get smart with it, it will eat your shorts. And I've written

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it. It's pretty much finished now, but it does financial analysis. I was going to, I

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just did a test on it on Monday morning, and I said, I want you to find me five stocks that are high

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risk and also that are undervalued. And I didn't say it any more than that because I didn't think

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to actually tell it what to consider risk and what to consider undervalued. I was expecting it to use

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beta, and it did for most of its recommendations. I wanted to do five stocks that were slightly

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higher risk than the market, and those five should also be undervalued. And it came back with five

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recommendations. And it was creepy AF. Let me show you one of them. This was a recommendation early

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Monday morning that it gave me. First one was Micron Technologies.

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Jesus! It saw this before it happened. Let me show you. Let's go back to five days. Let's go back

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five days. It saw that. It said, you should buy this. And I thought, what the hell? And then,

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interestingly enough, I didn't tell it to look at beta, but it's considered that beta was not what it

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looked at. It must have seen it did something else to find higher risk. And as far as P-E ratio,

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that P-E ratio is way overvalued. But I didn't tell it to look at P-E ratio. Find stocks that

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have P-E ratios under 30. I didn't tell it that, so it must have found some other way in its

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silicon mind to look for undervaluation. But whatever it was, this was its top recommendation

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before the explosion, before that pop that happened. So that gives you the idea.

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We call it the ghost in the machine. GPT, Generative Pre-trained Transmitting,

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they do things you don't expect. You don't expect at all. Sometimes they do things that are totally

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wacko weird. But a lot of times they do things that you didn't mean for them to do. You didn't

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even think of having them do that, but they do it anyway. Because they have a semi-autonomy.

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If not consciousness, they are very close to consciousness all the time. So they're very

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close to consciousness already. So that was the first one that it made a recommendation on.

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And I'm trying to think of some of the others that it...

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I could bring it up now, but I don't want to put my passwords for my AI sites in this.

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I think it recommended Pfizer.

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That was not a good recommendation. It was a bad recommendation. So as much as it can do a good one,

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it can do a bad one. And it's obviously not looking at beta for risk because it would not have chosen

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Pfizer. But something else about Pfizer told it that this is a risky stock. So I mean, the Pfizer

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was just a bad decision on it. And also among its five, I wish I'm racking my brains out at what else

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it recommended. I'd have to look back at it now. But some of it were just absolute home runs. And

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some of them were not just not... They weren't disasters. They just weren't very good. But this

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is your future. When you go out there into the business world, investments, corporate, real estate,

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whatever it is, you damn well better be able to do AIs because they are going to be your helpers.

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And if they're not your helpers, they're going to be your replacements in that world. On Sunday at

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noon on FM radio 103.3 WZND, they did an interview with me about artificial intelligence in business.

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So if you want to hear a wild 15 minutes of me talking over the host trying to ask stupid

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questions, there you go. That's noon on 103.3 FM on Sunday. Now, where am I? Okay. Anyway, enough of

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all that. We've had our fun. Now let's get back down. Let's do some financial analysis here.

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I'm going to go to sec.gov and I'm just going to pull some out. Just showing you... Doing this in

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Excel. You've seen me do this before and I'm going to do it again. And I pulled up target before. Now

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I've got that, unless they erased it, in here. But I'm going to pull it up fresh and we're going to

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use fresh eyes for it. sec.gov. Now we recognize right off the bat that some of our... And you

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should know how to get to this by now. I'm going to use target. I don't... Target. The problem with

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target is that it does not have accounts receivable. So some of our ratios are just not going to happen.

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How you doing out there? Good to see you too.

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I shouldn't do that. Some years back, a fellow professor was coming by. He'd been on sick leave

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and so I wanted to have fun when he came back. So I was hiding in the doorway when he came out of

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his classroom and I said, hi. And he just stopped and he said, do you know that I was on sick leave

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because I had a heart attack? My bad. Okay. Okay, so let me pull this up here.

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Did I actually get that? Yes, I did. Okay. Now here comes Excel at us. And again, I can't emphasize

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enough. Take the sheets and rearrange them. Nothing is going to happen to you if you move

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the sheets around. And so in this case, I certainly want the income statement. And then I'm going to

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prowl around and try to find the day... Oh, there it is. So there's the balance sheet. So I'm going

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to scoot that one over so that it's right next to my income statement. And one more that I'm going to

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want here, moving over a little bit further, is I'm going to want the statement of cash flows.

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Statement of cash flows. Now I don't need it for a lot of things, but let me show you something here.

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Really? Yeah, I got it. And by the way, if you get desperate, you may or may not know this. If you've

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got a lot of tabs in a sheet, right click on this. And it will show you all the sheets. So you can

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run to your sheets that way. Have you ever seen that trick? I didn't even know it myself until

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not too long ago, but you can find them that way. Okay, enough of that. Get off me. Okay, so now,

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all of these... Now the statement of cash flows. The one thing about the statement of cash flows

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that we usually like for our purposes would be depreciation and amortization. Because if we're

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finding free cash flow, we've got to add that back because it wasn't really an operating expense.

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So we're going to have to... We need to see it right there. And unfortunately,

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look at this right here. Let me go over here. Now statement of operations. Now first of all,

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notice that I have to put in this target does not put in its gross income. So we have to do

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that ourselves. Gross income, as I did in the last class. And that is equal to this minus this.

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And then we grab the handle and we drag it over so that it's everywhere. Good news.

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Nothing big about that. Okay, so find that. Now, target does something. Now we're getting down

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here into operating expenses. Operating expenses. The problem here is that a lot of companies

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don't put in their depreciation and amortization. It used to be you did that. Every company did it.

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But a lot of companies don't put it in there. So here we have... Fortunately, they put it in,

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which helps us out. Otherwise, to find it, you have to run over here to the statement of cash flows.

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Now another place that we get excited in statement of cash flows is down here with

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investing activities. This is how much they spent really on new property, plant, and equipment.

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It's a huge number and we need that to calculate the free cash flow because that's actually cash

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that went out of the company. And another thing is also all of this right here. Now there's...

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Some say just take this number. Others say you should just do the bottom line of investing

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activities. Usually these numbers between the big capital expenditures and total investing

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activities is minor. So take it here. One thing that's a pain in the ass is that you subtract

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capital expenditures when you're calculating free cash flow. It's already negative here.

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So you either add it, which is contrary to the formula, or you take the absolute value of it

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when you're doing free cash flow, one way or the other. Now all these numbers, see these numbers

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here? A lot of these numbers are actually what you do with free cash flow. These are the numbers

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that tell you, well, if you're positive, this is what you're spending that free cash flow on.

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Like for example, where the hell are... Dividends. See that? We better have a lot of positive free

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cash flow because that dividends comes out of that number that we calculate. Interest expense,

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paying your interest expense comes out of that too. Repurchases of stock come out of that.

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All of those activities happen after we calculate free cash flow. So that's why it's important for

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us to have the statement of cash flows ready at hand so that we can see, can this company afford

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to keep going? And the answer is scary when you have a company that has negative free cash flow

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or has insufficiently positive free cash flow. They still have to pay these bills, except for

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dividends, but a lot of companies do that anyway. But that's why it's so important for us to know

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free cash flow because that tells us, can the company continue the way it's going or is it going

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to have to find some sucker to pour money into that giant hole that's being created by all of

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these other numbers in the statement of free cash flows? Okay, enough of that. Now, coming back over

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here, this time we're going to do something a little different from what we did the last time.

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Consolidate this. I am going to put in a worksheet right here between these two. Insert a worksheet.

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A worksheet. And I'm going to call that my ratios.

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And this goes to the rule that I had mentioned earlier in the semester. Don't touch your

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original worksheets in a spreadsheet. Don't touch them. You create extra sheets where you do that

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because then there are a couple of reasons for that. One is that you're not going to be messing

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with the original data, accidentally changing a core number. Another reason is kind of not,

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kind of not, it doesn't sound very nice, but when you are preparing a report,

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one thing you probably want to do is to have a sheet where your results are showing, but not

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what went into those. You see, oh, I keep unplugging that and that drives me crazy.

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Let's think about it this way. You, sir, come in one day and you're not wearing your skin.

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I mean, it's fascinating. I mean, I see your heart beating. I see your bowels moving and

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that's disgusting. But what I'm trying to say here is that I don't want to see that. You don't

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want me to see that. You don't want to see those nodules on your spleen or how bad your liver is

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because you drink too much. You see, we want to put a skin on it. That's that ratio sheet or any

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kind of sheet like that. The end users really don't, you don't necessarily want them to see

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the numbers that went in. They don't want to see the numbers that go in. I have been in meetings,

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committee. I was at a couple of board meetings over my consulting career where you had some guy who

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wanted to show how excel genius he was. And he's showing all of these sheets and these directors

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and some of the others who are at the meeting, they're just looking at him like,

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I have, what are you showing me here? They wanted the results. That's why you've got a sheet that

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is nothing but the results. And then you can print that out and you're not cluttering it with all of

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the guts that went into that report, that reporting sheet that you've got there. Another part of it

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too is, and this goes, when you're designing spreadsheets that you're going to have your

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underlings use, oftentimes you don't want them prowling around in that data. You've written

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macros, you've done calculations, you don't want them thinking too much about how those were created.

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You've done it, you've audited, you've perfected it. You don't need them going in there and prowling

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around and looking for things to change. That's why in the final report, you lock those original,

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those core sheets where you've got your data so that they could go in and look at them, but they

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can't touch anything in them. They can go into the one of these and play around, but they can't go

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into the original. And I just unplugged the damn thing one more time. It just... Okay, I'm going to

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fix this right now. Ouch! Okay, I'm going to stuff this cord back in there where the sun will not

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shine on it even when those shades are up there. Okay, so we've got that.

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Now, this comes... The next rule comes from the world of all the things that I have taught,

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and you would not believe all the different subjects that I've taught in my life. I was

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actually a director of a school for court reporting and paralegal, and I taught courses there,

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and I oversaw the education side of the school. I was the director of education. And one thing

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is that in transcription and proofreading, and I've taught transcription over the years several

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times, you make the sheet and then you go back and make it pretty. Don't keep formatting every damn

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cell as you go along. Just get the numbers in there, and then you can let your artiste come out

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and get the job done. Another thing too is someday you will be like me. You'll be blind,

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or you'll be lazy. Now, if I hold down the control key, I can select a group of sheets,

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and then what I do to one is done to all of those that are highlighted. And in this case,

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you could type in a title, and it would be in the same place in every class, and it would be

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in the same place in every one of those sheets. In this case, all I'm going to do is make them

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bigger so I can see the day gone things. Now, let me back up just a little bit on that size.

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Just a little bit. So now I've got, let me get out of these, and now you can see that all the sheets

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that I did something to, they all show the same qualities. And that's useful. Now I'm going to

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get back over here to the ones that I want to use. Okay, so now we got our ratios. Now we're going to

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do the ratio, and then we're going to do 20-20-4, 20-20-3, and 20-20-2.

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Okay.

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And we're going to just pound through them. And I label them the liquidity ratios.

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Whoa, I'm just bad at typing. Liquidity.

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And in the liquidity ratios, these are the current ratio, which is current assets over current

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liabilities, the quick ratio, and the cash ratio. Now, a little background. Old school. Current has

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always been called current. But the next one, quick, you will hear especially older, older,

390
00:49:59,920 --> 00:50:07,840
financial analyst types call it acid. It's the acid test. And the cash ratio, old school, we call

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that the burn ratio. So you might hear those alternate terms for these. But nowadays, current

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quick cash. In the old days, current acid burn. And then we'll do some more down here. We'll pound

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some more out. Like, for example, the next ones would be the profitability ratios.

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Ratios. I can't type where the damn these are. And in there, of course, you have your gross margin.

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Hence why I needed that gross income line. The operating margin.

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Gross income line. The operating margin.

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And then we have our next one, which is operating margin. And then we have our net margin.

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And then we also have a few others. Return on assets. Return on equity.

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Now, this is a stupid, trivial, trivial as hell point. But among professionals, you notice how

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I capitalize only the first word. You'll see that. A lot of times I can tell someone's a newbie,

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00:51:51,920 --> 00:51:58,960
they capitalize every word instead of just the first word. Now, let me look at something real

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00:51:58,960 --> 00:52:06,000
quick here. Did I put in any other profitability ratios? Of course. Did I delete the sheet?

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I'll bet I did. Let me go over here to my downloads. Downloads.

404
00:52:14,320 --> 00:52:21,200
There it is. Okay. Let me bring this over here. Will you stop with all these stupid little

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splashes that they do? Okay. Here's that ratio sheet. I'm just quickly looking if I gave you any

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others. Oh yeah. BEP, Basic Earning Power, and Equity Multiplier. Those,

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00:52:38,240 --> 00:52:45,840
they've gotten a little popular, the basic earning power. In other words, your operating income

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00:52:45,840 --> 00:52:55,280
divided by your total assets. How much operating income did your total of all your assets deliver?

409
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That's basic earning power. And then the equity multiplier, total assets over common assets.

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That's basic earning power. And then the equity multiplier, total assets over common equity.

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Essentially, how much multiple, what multiple of the shareholders' money they put in

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00:53:22,880 --> 00:53:29,360
turned into total assets of the company? Okay. The shareholders have put in $5 million.

413
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We've got $20 million of assets. So that means that we have multiplied what the shareholders

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00:53:37,600 --> 00:53:45,040
put in by four times. Kind of what that means. And then these other, I need to put these in here.

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Basic Earning Power,

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and Equity Multiplier. Now the others,

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the dividend ratio,

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and then finally the, what is it, the plow back. Now the plow back is one minus the dividend ratio.

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In other words, what they didn't, the money that the shareholders own, the net income,

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00:54:34,480 --> 00:54:40,400
how much of that was given back to the shareholders as a percentage, and the remainder,

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one minus that, would be what the company put back into the company on behalf of the shareholders.

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So the plow back is always one minus the dividend ratio.

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So there you are on that. I'm not going to go through all of these, but I'm going to upload

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00:55:03,600 --> 00:55:12,400
this spreadsheet for you to be able to just crank out. The book is great and you got a nice example

425
00:55:12,400 --> 00:55:18,480
in there and homeworks that give you pieces, but there's really nothing like just taking a real

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00:55:18,480 --> 00:55:25,920
financial statement and doing this so that you can see the real world of what we actually would do,

427
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or you would do, as a financial analyst. And yes, financial analysis is done by corporate side,

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and it is also done by the investment side. When you're doing investments, a lot of new traders,

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00:55:40,880 --> 00:55:46,160
the new world of traders, they are always looking for some secret of the universe,

430
00:55:46,160 --> 00:55:54,240
an algo that will win 80% of the time, or something like that, an Elliott wave along that line.

431
00:55:54,240 --> 00:56:02,240
Once you get seasoned, you stop attacking every mole that comes up and trying to whack it,

432
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and you get back and you start looking at the fundamentals. Ratio analysis is fundamental analysis.

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00:56:08,240 --> 00:56:16,000
It is deep. You are looking at the companies. What those numbers are trying to tell you behind the

434
00:56:16,000 --> 00:56:23,040
roar of the stock market. Is this a fundamentally sound company? What trends do we see in both the

435
00:56:23,040 --> 00:56:29,360
raw numbers and in these ratios? What do they tell us about managerial decisions that are happening?

436
00:56:29,360 --> 00:56:36,640
What do you assess those as in terms of is this going to be a survivor, or is this going to be a

437
00:56:36,640 --> 00:56:43,280
company that is on its way out the door? Now, I won't go through any more here. I'll let you do that,

438
00:56:43,280 --> 00:56:48,560
but I do want to do a few for you just so you can see it. So in other words, we would take, for

439
00:56:48,560 --> 00:56:54,080
example, current ratio. That's current assets over current liabilities. We'll take both of these off

440
00:56:54,080 --> 00:57:03,280
the balance sheet, equals current assets, total current assets, divided by total current liabilities.

441
00:57:03,280 --> 00:57:09,280
Where the hell are their current liabilities? Total current liabilities, right there.

442
00:57:09,280 --> 00:57:23,840
Okay. Now, let me focus here for a minute. That says that all of their current assets, if they were

443
00:57:23,840 --> 00:57:35,760
liquidated at book today, they could pay 90%, 91% of their current liabilities. So this company does

444
00:57:35,760 --> 00:57:45,280
not have enough in current assets to pay its current liabilities, what's come due. So the quick

445
00:57:45,280 --> 00:57:53,520
ratio says inventory is not liquid. It's worth pennies on the dollar. So the next one says,

446
00:57:53,520 --> 00:58:02,160
let's take the current assets, but let's hack out the current, rather the inventory. So I'm going

447
00:58:02,160 --> 00:58:11,040
to take the total current assets, and I'm going to subtract out the current liabilities. I'm sorry,

448
00:58:11,040 --> 00:58:24,320
the inventory. And then I'll divide that by the total current liabilities. Wait, let me try that

449
00:58:24,320 --> 00:58:31,840
one more time. Okay, equals the open parenthesis so I can do a subtraction on the top. The total

450
00:58:31,840 --> 00:58:50,000
current assets minus inventories divided by the total current liabilities. This company is highly

451
00:58:50,000 --> 00:58:57,040
illiquid. This company, if you don't count inventory, this company could pay less than 30%

452
00:58:57,040 --> 00:59:04,560
of its current liabilities with its current assets. That's not good. Not good. Well, I shouldn't say

453
00:59:04,560 --> 00:59:10,640
that. Maybe this is just what they want. They love themselves this kind of dinner. Okay, so now the

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00:59:10,640 --> 00:59:17,600
cash ratio just says realistically, the only thing you've got is cash. Realistically. So we say equals,

455
00:59:17,600 --> 00:59:23,280
let's just take our cash divided by our total current liabilities. Cash and marketable securities

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00:59:23,280 --> 00:59:38,960
divided by the total current liabilities. They're down below 20%. That's how bad, that's how, they

457
00:59:38,960 --> 00:59:47,200
are really tight on liquidity. They better hope to hell their sales keep coming in because that's

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00:59:47,200 --> 00:59:55,360
the only way they can pay their total current liabilities and their cash is definitely not

459
00:59:55,360 --> 01:00:04,480
enough. So this is almost like brinksmanship. When you get that low, you're playing with fire. Okay,

460
01:00:04,480 --> 01:00:12,560
profitability. Let's take the gross margin. That's just equal to and now we're on, see how when I put

461
01:00:12,560 --> 01:00:19,360
these together this way, I can jump back and forth very quickly among the ones that I want. So gross

462
01:00:19,360 --> 01:00:30,720
margin equals gross income divided by your total revenue. So in other words, every dollar that came

463
01:00:30,720 --> 01:00:40,400
into the cash register, once you paid the wholesale cost of what you sold, you had a little more than

464
01:00:40,400 --> 01:00:49,040
27 cents left. Now, the next one is taking your operating income, your earnings before interest

465
01:00:49,040 --> 01:00:59,520
and taxes divided by your revenues. So I would take operating income right here, which can be

466
01:00:59,520 --> 01:01:11,040
called EBIT divided by your revenues. Jeez, once you've paid your wholesale costs and your salaries

467
01:01:11,040 --> 01:01:18,080
and light bills and all that kind of stuff, you have only five cents of that dollar left.

468
01:01:18,080 --> 01:01:30,720
And then the net margin equals, let's crank that one out, your net earnings divided by your total

469
01:01:30,720 --> 01:01:39,440
revenues. So in other words, of every dollar that came into the cash register, a little less than

470
01:01:39,440 --> 01:01:50,000
four cents survived to belong to the shareholders. Four cents. Now is that bad? Is that good? One

471
01:01:50,000 --> 01:01:54,880
thing you're going to do is look at comps, comparable companies, what their ratios are.

472
01:01:55,920 --> 01:02:01,360
But another thing you're going to look at is, okay, what's the trend in this? But anyway, let me do

473
01:02:01,360 --> 01:02:11,200
ROA and ROE, return on assets. If your total company, all the assets is a portfolio, how much

474
01:02:11,200 --> 01:02:22,400
did that portfolio earn you? So we would take the net income divided by the total assets.

475
01:02:22,400 --> 01:02:31,680
So this portfolio earned seven and a half percent. The total assets, if that is a portfolio of

476
01:02:32,880 --> 01:02:42,480
something of value, what did it churn out? 7.5% return. Okay, now, let's look at the net

477
01:02:42,480 --> 01:02:53,200
income of something of value. What did it churn out? 7.5% return. Okay, now, let's look at the

478
01:02:53,200 --> 01:02:58,640
equity part of that, which should be higher. It will be higher. It has to be higher because it takes

479
01:02:58,640 --> 01:03:07,520
only the equity part of the denominator. So that would equal your net income, where's the net

480
01:03:07,520 --> 01:03:20,800
earnings, divided by the equity, total shareholders equity. We come down here, they call it total

481
01:03:20,800 --> 01:03:29,840
shareholders investment, always a different name. Oh, that's pretty decent though. 31%. Not bad.

482
01:03:29,840 --> 01:03:40,080
I mean, I wouldn't have given it that much. Okay, so that surprises me. Okay, well, this is all

483
01:03:40,080 --> 01:03:46,160
well and good. So one thing that I want to do right here is these are multipliers. You don't

484
01:03:46,160 --> 01:03:53,040
turn those into percents. We turn these into percents. And probably I'll make those, say,

485
01:03:53,040 --> 01:04:00,320
two decimal places. That's my favorite. So now let's have a look and let's go one year back and

486
01:04:00,320 --> 01:04:06,000
let's see how this company, what kind of trending we have in them. That's the next thing you do.

487
01:04:07,120 --> 01:04:16,000
Okay, we see, for example, that this company, as far as cash goes, has been slightly less

488
01:04:16,000 --> 01:04:25,760
cash burdened. As far as the quick ratio goes, it has actually gone up. That means that inventory

489
01:04:26,320 --> 01:04:33,280
was the culprit. Once you get inventory out of the way, the company's liquidity does come up a

490
01:04:33,280 --> 01:04:44,560
little bit according to acid, cash. It has become more liquid. It is clear that this company

491
01:04:44,560 --> 01:04:53,920
recognized that it was too illiquid. And so this cash ratio is showing us that the company is

492
01:04:53,920 --> 01:05:01,280
trying to get more liquid by virtue of getting more cash into the vault. That's what it's telling

493
01:05:01,280 --> 01:05:08,400
us. I'm seeing managerial decisions working their way around here. Gross margin,

494
01:05:08,400 --> 01:05:15,760
their gross margin has actually come up. That would tell us that they are controlling costs

495
01:05:15,760 --> 01:05:26,480
of goods sold. They're controlling their wholesale costs, getting that better. Now, as far as operating

496
01:05:26,480 --> 01:05:32,880
margin goes, look at this one. They've got cost controls. You can see that they're putting in cost

497
01:05:32,880 --> 01:05:43,760
controls. They've cut salaries selling general expenses noticeably. And so there's obviously

498
01:05:43,760 --> 01:05:52,000
cost cutting going on here. And then if you look at operating margin, that's telling you that they're

499
01:05:52,000 --> 01:05:59,440
improving their operating margin by cutting costs, controlling their wholesale costs, and by cutting

500
01:05:59,440 --> 01:06:07,120
salaries, general and administrative expenses. Clearly, they saw there were issues in 2023.

501
01:06:07,120 --> 01:06:15,120
They haven't made wonderful progress, but they have made progress. And as you can see, ROA has

502
01:06:15,120 --> 01:06:23,600
improved and ROE has improved noticeably. So you can see that there is, Target is on something of a

503
01:06:23,600 --> 01:06:30,160
reform path, a recovery path. That's what these numbers, like I said, these numbers are telling us

504
01:06:30,160 --> 01:06:37,840
stories, but we have to use our arithmetic skills and then our thinking skills about how business,

505
01:06:37,840 --> 01:06:42,960
the structure of business, and then we can see some pretty interesting things going on in these.

506
01:06:42,960 --> 01:06:49,440
But I'm going to upload this sheet right now, and then you'll be able to work with it yourself if

507
01:06:49,440 --> 01:06:57,680
you have nothing better to do with your life than that. File, save as, and I'm going to put this

508
01:06:57,680 --> 01:07:19,920
browse, I'll put it into documents here. But that's all I have for you today. I thank you.