1 00:00:00,000 --> 00:00:08,000 Alan Cring Productions in association with the Emergent Light Studio presents 2 00:00:10,000 --> 00:00:16,240 the Illinois State Collegiate Compendium... Academic Lectures in Business and Economics. 3 00:00:17,840 --> 00:00:24,080 This is Business Finance, FIL 341 for autumn semester 2024. 4 00:00:24,080 --> 00:00:39,360 Today, ratio and common size analysis. This is the end of the lecture material. You have your 5 00:00:40,480 --> 00:00:46,640 midterm exam next week. On Tuesday, we will review for it and then on Thursday you'll take the test, 6 00:00:46,640 --> 00:00:56,080 the midterm exam. Now the Thursday class, the class after this one, I don't have a lot to do. 7 00:00:56,080 --> 00:01:02,720 It's more technical just using the Excel sheet, using Excel to do as your basis for doing your 8 00:01:02,720 --> 00:01:09,120 analytical tools. And of course, I strongly encourage you just as a heads up and I'll review 9 00:01:09,120 --> 00:01:14,640 fully for the midterm exam on Tuesday of next week. But you are allowed to use your notes on 10 00:01:14,640 --> 00:01:22,160 the exam. I have no problem with using and bring along that ratio formula sheet that I gave that I 11 00:01:22,880 --> 00:01:33,840 is in your files. Financial ratios formulas or something like that. Do bring that one up 12 00:01:33,840 --> 00:01:41,040 and have that one available for the midterm exam. I don't necessarily care so much about you being 13 00:01:41,040 --> 00:01:47,280 able to accurately calculate ratios. You've got Excel to do that. What I do care about is your 14 00:01:47,280 --> 00:01:53,280 interpretation, which is why I'm spending more than a couple of days looking at financial statements 15 00:01:53,280 --> 00:02:01,200 and doing what is truly financial analysis. A lot of what we do in almost any area of finance, 16 00:02:02,000 --> 00:02:10,480 well, is some kind of financial analysis. Looking at the financial statements and then shaking them 17 00:02:10,480 --> 00:02:17,840 out. Today I'm going to do, as I said, the ratios, finish that up, do that all. And then I'm going to 18 00:02:17,840 --> 00:02:25,680 do the common size financial statements. And then I'll probably just kill it at that point. And then 19 00:02:25,680 --> 00:02:33,840 on Thursday, we'll do free cash flow. Now there are, it may be a little bit of pro forma, but 20 00:02:33,840 --> 00:02:43,200 if our free cash flow goes, in the business there are several detailed meticulous ways to do free 21 00:02:43,200 --> 00:02:52,800 cash flow. Then there's what we used to call dirty free cash flow. It was a faster way to get the free 22 00:02:52,800 --> 00:03:01,200 cash flow of a company. It actually comes out with numbers that are very similar to what you would do 23 00:03:01,200 --> 00:03:09,600 if you broke down and did all these weird things. And so I generally teach the dirty free cash flow 24 00:03:09,600 --> 00:03:15,600 way and it gets you good results and it gets you just fine. You see in free cash flow, 25 00:03:17,920 --> 00:03:26,720 free cash flow is very rarely close to zero. It's either a big fat positive number or a big fat 26 00:03:26,720 --> 00:03:33,680 negative number. And you don't see much that's where, well, if we'd done this calculation a 27 00:03:33,680 --> 00:03:38,480 little bit more accurately, it could have been positive instead of negative. It's not going to 28 00:03:38,480 --> 00:03:44,720 work that way in real life. And we'll do a couple of financial statements. You'll see those on 29 00:03:44,720 --> 00:03:50,720 Thursday where we run free cash flow analysis the dirty way. You'll see that it's either a big 30 00:03:50,720 --> 00:03:55,840 positive number or a big negative number. And you could have done some little nuances in there. 31 00:03:55,840 --> 00:04:01,520 It wouldn't have changed it. Here's the thing. If it's negative, that's bad. If it's positive, 32 00:04:01,520 --> 00:04:09,040 that's good. There's no equivocation about it. And the more positive it is, the better, really. 33 00:04:10,720 --> 00:04:16,880 Some ratios, and I'll bring this up and then I want to look at the numbers. Some ratios, 34 00:04:16,880 --> 00:04:24,320 well, actually many ratios, there's not a good number. You can have a number that is near the 35 00:04:24,320 --> 00:04:30,080 industry average. Well, yay for that. But what happens if you're in an industry that sucks? 36 00:04:30,080 --> 00:04:35,760 All the other companies are terrible. Do you really want to be in the pack of that average? 37 00:04:36,720 --> 00:04:42,480 So you have to think of each company on its own to a certain extent. Obviously, we want to look at 38 00:04:42,480 --> 00:04:48,960 the industry averages, but at the same time, we also want to say to ourselves, well, maybe we're 39 00:04:48,960 --> 00:04:55,360 different from the industry average, but maybe that's a good thing. Say your industry average 40 00:04:55,360 --> 00:05:03,600 inventory turnover ratio is 4.5. Well, that's a pretty slow inventory turnover ratio in the 41 00:05:03,600 --> 00:05:12,320 modern age. So we could say, well, we're above 4.5. That's a good thing. Or we're below 4.5, 42 00:05:12,320 --> 00:05:18,720 and 4.5 really kind of sucks, so we're in a really bad position here. So ratio analysis does have 43 00:05:18,720 --> 00:05:23,760 that judgment call in it, and that's what we do in here, and that's what I'm trying to empower you to 44 00:05:23,760 --> 00:05:29,760 be able to do. Know enough so that your judgment actually means something. A judgment without 45 00:05:31,600 --> 00:05:35,600 education and experience is nothing but another opinion on the internet. 46 00:05:36,400 --> 00:05:42,000 So first of all, let's look at the numbers just for a little bit, and the numbers are actually not 47 00:05:42,000 --> 00:05:49,680 very happy at all today. It is definitely a negative day, and the Dow is the least of our 48 00:05:49,680 --> 00:05:58,720 problems today, of course, compared to the S&P 500. The Dow is down a little more than a half a 49 00:05:58,720 --> 00:06:07,040 percent. Excuse me, the S&P 500 is down about 1.14 percent, and then you've got the NASDAQ. 50 00:06:07,040 --> 00:06:14,320 Am I seeing that right? Is that 1.81 percent? Now that's kind of serious. We had some negative. 51 00:06:15,200 --> 00:06:21,120 We had mixed data coming out today, and that's spooking the markets. It's really spooking them 52 00:06:21,120 --> 00:06:28,400 because there's always that fear in the back of our minds that there's a recession right out there 53 00:06:28,400 --> 00:06:35,680 around that corner waiting to kick us in the ass. Most of that fear comes from that inverted yield 54 00:06:35,680 --> 00:06:40,960 curve. We've had an inverted yield curve for several years now. It is not just a normal inverted 55 00:06:40,960 --> 00:06:47,520 yield curve, it is a yield inverted yield curve from hell, and it doesn't seem to have created a 56 00:06:47,520 --> 00:06:55,280 recession yet, and yet we know that every recession has been preceded by an inverted yield curve. 57 00:06:55,280 --> 00:07:02,560 So we're waiting for this to happen. We hope it won't happen. We're going to break the historical 58 00:07:02,560 --> 00:07:10,800 trend, the historical reality, but we still are afraid, and every time we see some negative 59 00:07:10,800 --> 00:07:27,360 numbers, well, we get spooked by what is happening. Now, crude oil has had a big jump, and if you are 60 00:07:27,360 --> 00:07:32,960 watching the news or some of the more reputable sites on the internet, you can see that missiles 61 00:07:32,960 --> 00:07:42,640 are raining down on Tel Aviv, this capital of Israel, and that from Iran, their ballistic missiles, 62 00:07:42,640 --> 00:07:48,160 their mate, I don't know if I would call them Mark IVs, in other words, they couldn't reach Europe, 63 00:07:48,160 --> 00:07:55,280 but they can certainly take a big swing across the sands of Arabian sands, and they're slamming into 64 00:07:55,280 --> 00:08:01,680 Israel, and the Iron Dome isn't stopping them. If you watch the videos, lots of those missiles are 65 00:08:01,680 --> 00:08:08,080 hitting pay dirt. Only a few are being intercepted. That's going to probably set Israel on a path 66 00:08:08,080 --> 00:08:15,280 toward full-blown war, possibly with Iran. If we go to war with Iran, the price of crude oil could 67 00:08:15,280 --> 00:08:28,320 go through the freaking roof. Here's why. Iran has wanted to be a respectable player on the international 68 00:08:28,320 --> 00:08:36,960 stage, despite the fact that it is a highly ideological, violent theocracy, about everything bad 69 00:08:36,960 --> 00:08:47,520 Westerners see in Iran, but if Iran is back to the wall, they could very well mine the Strait of 70 00:08:47,520 --> 00:08:53,680 Hormuz. It's a very narrow channel that comes out of the Gulf and gets out to the Indian Ocean, 71 00:08:53,680 --> 00:08:59,520 and if they mine it, that means that the ships going through it will blow up. They also have a 72 00:08:59,520 --> 00:09:06,480 battery of old silkworm anti-ship missiles that can really tear up. We could probably, a modern 73 00:09:06,480 --> 00:09:13,440 fleet of battle ships would have no problem with the silkworms. However, they also have Mach 5 74 00:09:13,440 --> 00:09:18,720 sunburns, and those sunburns could probably get through, at least some of them could get through 75 00:09:18,720 --> 00:09:28,880 even our Aegis systems on our ships. So that means that if things go sour sideways, the price of oil 76 00:09:28,880 --> 00:09:36,000 is going to go to $100 a barrel, probably $125, and so that will send all the Western 77 00:09:36,000 --> 00:09:41,280 economies into a recession right away. This is when you get to the point where you're doing 78 00:09:41,280 --> 00:09:47,520 financial analysis. You notice that I'm talking about global events, politics, war, shipping, 79 00:09:48,160 --> 00:09:55,280 and all of that. This is when what you may want to aspire to, it's when you know more than just the 80 00:09:55,280 --> 00:10:03,040 textbooks and the typical news articles, and you begin to have an understanding of how the world 81 00:10:03,040 --> 00:10:10,000 puts together and how those pieces can, when they break apart, what the domino effect is of those 82 00:10:10,000 --> 00:10:17,920 things. This is our world. We're finance people, and so it all boils down to capital and money 83 00:10:17,920 --> 00:10:24,720 and how it flows and what can stop it from flowing and what that can do to economies around the world. 84 00:10:25,280 --> 00:10:31,040 So when I talk about this, I'm not just blowing information out of my butt. I'm telling you what 85 00:10:31,040 --> 00:10:36,560 this is, how it's going to help, what you need to know to be better than the average, and thank God 86 00:10:36,560 --> 00:10:42,800 you've got the best professor who ever walked the earth teaching you. Okay, or something like that. 87 00:10:42,800 --> 00:10:48,800 Okay, look over here. We've got crude oil and look at gold, the gold bugs. Oh God, the apocalypse is 88 00:10:48,800 --> 00:10:55,360 happening. Jesus is coming back. Buy gold. See it? So you see them freaking out today. 89 00:10:55,360 --> 00:11:02,400 How much can you take? How seriously can you take them? Eh, you know, it is what it is. Now 90 00:11:02,400 --> 00:11:08,000 interestingly, 10-year bonds have finally, the yields have turned the other way, which is good 91 00:11:08,000 --> 00:11:14,720 news. They had been going up those yields had, despite the fact that interest rates, the Fed was 92 00:11:14,720 --> 00:11:20,160 trying to bring down interest rates, but now the yields are finally settling back somewhat, which 93 00:11:20,160 --> 00:11:27,520 is good news for us. That will help. They're still not down. They had gotten down to about, I think, 94 00:11:27,520 --> 00:11:36,640 3.63% the yields had. They're still higher than they were a couple of weeks ago, but still we're 95 00:11:36,640 --> 00:11:42,960 glad for anything that happens in this kind of a world. Now look, here's what could be going on. 96 00:11:42,960 --> 00:11:50,960 This is a flight to quality. As the stock markets, as investors exit equities, they sell equities, 97 00:11:50,960 --> 00:11:56,880 that freeze up funds, and so if they're looking for safe harbor, the next place they're going to 98 00:11:56,880 --> 00:12:04,160 go is to bonds, which are safer than stocks in general. So that is what we're seeing here, 99 00:12:04,160 --> 00:12:10,880 is investors are buying into the bonds, price of the bonds goes up, and yields go down. So this is 100 00:12:10,880 --> 00:12:18,800 a classic flight to quality that we're seeing today. The equity markets over here, everyone's 101 00:12:18,800 --> 00:12:25,840 getting the hell out, so what's happening is on this side over here, well that means that they're 102 00:12:25,840 --> 00:12:31,280 getting out of risk, they're selling their equities, that freeze up funds, the funds, the safe 103 00:12:31,280 --> 00:12:36,640 harbor is the bonds, and as the bonds are bought, that pushes the price of bonds, demand for bonds 104 00:12:36,640 --> 00:12:43,600 goes up, price goes up, and yield goes down. Classic flight to quality. And the worrisome part is, 105 00:12:43,600 --> 00:12:50,640 we see that gold going up, that is the second stage of a flight to quality, and that can be a 106 00:12:50,640 --> 00:12:59,680 little concerning. I don't see gold, well let me look here again. Yeah, that's a little concerning, 107 00:12:59,680 --> 00:13:04,080 that's more than a percent increase in the price of gold. So, 108 00:13:04,080 --> 00:13:10,400 yeah, remember, flight to quality, stage one, from stocks to bonds, stage two, from bonds to gold, 109 00:13:11,200 --> 00:13:18,960 stage three, from gold to bullets. We're not quite at the bullets yet, but maybe I should look at 110 00:13:18,960 --> 00:13:25,440 some of the firearms manufacturers, see how their stocks are doing anyway. But anyway, there's what 111 00:13:25,440 --> 00:13:30,880 you're seeing, this is no mystery to us. We're finance people. There are things that surprise 112 00:13:30,880 --> 00:13:37,680 us, and you say WTF, and you've seen me do that a couple of times in this class, but in general, 113 00:13:38,560 --> 00:13:46,240 the motion of the markets is a clock, the pieces fit together in a very clean fashion. It's just a 114 00:13:46,240 --> 00:13:55,920 mystery and stuff for talking heads and conspiracy theorists outside of our realm, but in our realm, 115 00:13:55,920 --> 00:14:01,520 we stick to the science, and we stick to the logic, and to the economics, and the finance. 116 00:14:03,120 --> 00:14:10,720 Enough of that. Oh, what the heck was, oh look at that. The dollar is depreciating strongly against 117 00:14:10,720 --> 00:14:20,160 the euro, and against the pound as well. So, I mean, look, I don't know what you can say about 118 00:14:20,160 --> 00:14:29,600 that, other than that indicates weakening of the dollar, which is okay. If yields are going down, 119 00:14:29,600 --> 00:14:37,440 the dollar should weaken against other currencies, the currencies of our trading partners. If our 120 00:14:37,440 --> 00:14:45,120 yields are going down on our debt instruments faster than they are in Europe, Japan, Great Britain, 121 00:14:45,120 --> 00:14:49,840 well, that tells us that the dollar is going to weaken, and that's what we're seeing here. Yields 122 00:14:49,840 --> 00:14:54,800 are going down, dollars weakening against the major currencies, the euro and the pound. Japan, 123 00:14:54,800 --> 00:15:02,640 I don't know what's going on there. You've got to see Japan here today. Japan, I was watching this 124 00:15:02,640 --> 00:15:12,000 through the night, they had a very strong surge opening. Now, usually Japan's, the Tokyo 125 00:15:12,000 --> 00:15:19,920 has had this weird pattern. Something big happens, and it surges up, or usually down, 126 00:15:19,920 --> 00:15:24,960 right at the opening bell, and then it just sits there looking stupid. Today was a little bit 127 00:15:24,960 --> 00:15:31,680 different, because it started up, and it kept going up for a while, and then there was a sell-off 128 00:15:31,680 --> 00:15:37,280 there for a little while, and then it had another surge, and finally it just flattened out. But that 129 00:15:37,280 --> 00:15:43,280 was somewhat unusual. Japan's been taking a number of days, more bear days than bull days, 130 00:15:44,000 --> 00:15:52,160 recently. So this is good news. Now, if you look at the FTSE, it had a major drop-off a while ago. 131 00:15:52,160 --> 00:15:59,520 Now, the FTSE is, London is still open. The bell hasn't rung yet. So this is something that happened 132 00:15:59,520 --> 00:16:05,920 just about an hour ago. There was a major drop-off, and then it just went up, and then it 133 00:16:05,920 --> 00:16:12,720 just recovered. There was a big sell-off, and then the bulls came in and just bought the hell out of 134 00:16:12,720 --> 00:16:19,840 the bargains. It looks to me like it was bargain hunting. The market was dragged down, and everything 135 00:16:19,840 --> 00:16:25,200 was dragged down with it, and then the bulls came in and found a whole bunch of bargains, and just 136 00:16:25,200 --> 00:16:33,680 bought back in, and it came back from that big drop there very quickly. So here's what it is. 137 00:16:33,680 --> 00:16:41,200 Now, going over here, just to look at a couple of stocks, I've been interested recently in the 138 00:16:41,200 --> 00:16:52,240 bank stocks, and notice that they had a bad... the city has shed a lot of what it had gained over the 139 00:16:52,240 --> 00:16:59,200 past week or so. If you look at the month, and I'll look at a monthly chart on this, remember that 140 00:16:59,200 --> 00:17:06,880 these betas are heavy. They are risked, so you expect vol on them, but you see... 141 00:17:08,240 --> 00:17:17,520 okay, the one month here. You see how... well, I shouldn't say that. It's still kept, at least 142 00:17:17,520 --> 00:17:23,600 for today, it's still kept a lot of the gain that it has achieved over the last three weeks or so, 143 00:17:23,600 --> 00:17:31,520 but it has been... I want you to look down here. Just look at the volume. Do you see that cyclical 144 00:17:31,520 --> 00:17:38,960 waving pattern? There are these active, and then everyone backs off. Then active, then everyone 145 00:17:38,960 --> 00:17:47,520 backs off. It's not a smooth vol from day to day, week to week, and that... you see that with some 146 00:17:47,520 --> 00:17:54,320 stocks over a period of time that they have this... I hesitate to call it a pattern, but you will see 147 00:17:54,320 --> 00:18:00,640 some stocks, vol is about the same every day, but then you see these ones like this. It's like there 148 00:18:00,640 --> 00:18:07,200 are surges, and then everyone... no one trades, and then surges, then no one trades. Now these surges 149 00:18:07,200 --> 00:18:14,080 could be buys, these surges could be sell. You see these surges right here? These were sell, 150 00:18:14,080 --> 00:18:21,840 these were mostly sell. Then you see these little surge after surge after surge coming back up, 151 00:18:22,480 --> 00:18:28,640 and then it dies back down, but then you see now we're going back into the little wavelets again, 152 00:18:28,640 --> 00:18:33,040 and it looks like it's building for another one of those surges. You see how it seems to 153 00:18:33,600 --> 00:18:39,680 be getting ready for another one of these out here, like this one, even like this one back here. 154 00:18:39,680 --> 00:18:44,800 It looks like it's getting ready for a surge, which way? Don't ask me, I'm just a professor, 155 00:18:44,800 --> 00:18:50,880 but it's right out there. So this is something to look for if you are into investments that, 156 00:18:50,880 --> 00:18:55,440 like I said, some stocks you don't hardly ever see. It's very smooth vol from day to day, 157 00:18:56,000 --> 00:19:03,200 but in other ones it has that kind of pattern. Now looking over here, just to see BAC real quick, 158 00:19:03,200 --> 00:19:15,920 it's down too. Look at that spike right there, that's a sell spike. You see how it's a sell spike? 159 00:19:15,920 --> 00:19:21,920 See how it's spiked and that just brought it down? But interestingly, you really didn't have any 160 00:19:21,920 --> 00:19:29,200 signal and volatility when it started to turn around back here. So that's not as patterned, 161 00:19:29,200 --> 00:19:34,240 for lack of a better term, as Citi is. And then going over to Wells Fargo, the other one I've 162 00:19:34,240 --> 00:19:47,120 shown you before. That's down too. Now this one really doesn't pattern either the way Citi does. 163 00:19:48,000 --> 00:19:55,120 Like I said, some you can see it, some it's just not really there. But in this case, notice that 164 00:19:55,120 --> 00:20:02,400 Wells has a lower beta than Citi did. And you notice that volatility isn't nearly as strong 165 00:20:03,200 --> 00:20:09,120 as it was. Well let me let me qualify that. It's got some volatility, but it's still not that 166 00:20:09,120 --> 00:20:18,080 rocking stuff that Citi had there a while back. And another thing, when you're sitting around with 167 00:20:18,080 --> 00:20:24,080 finance people, this is the kind of stuff that you talk about. You reinforce yourself by saying 168 00:20:24,080 --> 00:20:29,680 yourself and each other through discussions about what's going on with these stocks. 169 00:20:29,680 --> 00:20:36,640 Noticing patterns, trends, things like that in the stocks. This makes you more sophisticated 170 00:20:36,640 --> 00:20:41,040 and it makes you more experienced for when you go out there and you have to do this in a live 171 00:20:41,040 --> 00:20:47,440 fire exercise in the business world. But anyway, coming over here I was, what was I looking at? Oh, 172 00:20:47,440 --> 00:21:00,800 our old friends TQQ. Look at that thing down hard today. TQQ is. That's a magnifier, that's a bull 173 00:21:00,800 --> 00:21:08,240 magnifier. And when the bulls are in bad shape, it magnifies the downside too. So this would be put 174 00:21:08,240 --> 00:21:16,000 territory. I don't know if I'd buy puts now. I think the mess is over with. However, look at its 175 00:21:16,000 --> 00:21:32,720 evil twin, the SQQ. And of course, it's up. Bouts the same. So if you were a bear late last night, 176 00:21:32,720 --> 00:21:37,680 you could have bought in the SQQ and you would have done really well. But if you were a bull 177 00:21:37,680 --> 00:21:46,400 last night and you bought into TQQ, you would have been wrecked today. So these are the kinds where 178 00:21:46,960 --> 00:21:52,960 you can take these if you have the courage of your convictions on bull or bear side. 179 00:21:53,520 --> 00:22:02,080 These will magnify your convictions into money in a rather noticeable way. I'll show you one more 180 00:22:02,080 --> 00:22:06,480 thing and I've probably shown you this a hundred times. I don't know if I have or not. The VIX. 181 00:22:06,480 --> 00:22:19,440 This is the metric of volatility. Look at that. Hot damn, that thing went crazy. 182 00:22:20,400 --> 00:22:30,880 Vol just spiked right in here. Well, I should say, well, the volatility, vol is volatility in this 183 00:22:30,880 --> 00:22:39,600 case. Look at that. It was just calm, smooth waters, nice lake to paddle on. And then it turned into a 184 00:22:39,600 --> 00:22:48,000 raging ocean right around at the beginning of trading today. Now remember, VIX is not a stock. 185 00:22:48,000 --> 00:22:56,480 VIX is an index. There is a futures contract. And so this thing doing that, this thing has been 186 00:22:56,480 --> 00:23:04,160 trading through the night and everything was nice and calm. And then right there, right before the 187 00:23:04,160 --> 00:23:12,000 opening bell, all hell broke loose. This happened before the bell. The bell was about here and the 188 00:23:12,000 --> 00:23:20,480 volatility index started the warning signs. This was going to be a really volatile day, probably 189 00:23:20,480 --> 00:23:28,160 what, about 30 minutes maybe before the market opened the bell. So you see right here that that 190 00:23:28,160 --> 00:23:36,160 was sort of like a quick, early, a very short fused early warning that it was going to be a fun, fun 191 00:23:36,160 --> 00:23:41,680 day on the market. Now do you want to play volatility? Here's one. VIXX. 192 00:23:41,680 --> 00:23:48,080 Whoops, didn't mean to do that. Let's try that again. 193 00:23:52,080 --> 00:23:56,240 What the heck? Is it going to show me VIXX? 194 00:23:56,240 --> 00:24:19,200 Well, no, VIXX. My bad. Geez. Oh, you would have done good on this today. You see that thing? And 195 00:24:19,200 --> 00:24:26,320 yes, you can trade that. So if you want to play this, play volatility. If you want to play vol, 196 00:24:26,320 --> 00:24:31,920 this is probably the best way to do it. And look at what you would have made. I mean, the options on 197 00:24:31,920 --> 00:24:40,640 that were just insane today. Call options were. I mean, if I was lamenting that if I had thrown 198 00:24:41,440 --> 00:24:47,680 a couple hundred dollars into call options out maybe two, three weeks near the money, just out 199 00:24:47,680 --> 00:24:57,040 of the money on the top side, I would have made a lot of money today. And it looks like the excitement 200 00:24:57,040 --> 00:25:05,360 is over with now. Let me look here. I don't know. It's still rocking in here, but it should calm 201 00:25:05,360 --> 00:25:11,920 down as we come toward the bell. At least that's what I've seen this thing do before. There's just 202 00:25:11,920 --> 00:25:20,320 all these traders just going crazy trading, and that reflects in volatility. And then as the 203 00:25:20,320 --> 00:25:27,680 traders begin to step back and say, I'm done. That's it. Game over. Let's go out and have beer 204 00:25:28,160 --> 00:25:35,840 or martinis or something. Then you see the vol begin to back down a little bit. I hope today. 205 00:25:35,840 --> 00:25:41,760 If it keeps on going through the night, then you'll know that there is probably going to be another 206 00:25:42,560 --> 00:25:52,640 really hard day tomorrow. But one warning. There's an old saying, down today, up tomorrow. And so you 207 00:25:52,640 --> 00:25:58,560 might very well see a turnaround the other way tomorrow. Keep an eye on the volatility. If the 208 00:25:58,560 --> 00:26:04,880 vol is still going crazy, that probably means it's going to be an upside day. If the vol starts going 209 00:26:04,880 --> 00:26:11,280 cuckoo bananas, vix, with a little hat. If that's leading into tomorrow morning, and it's beginning 210 00:26:11,280 --> 00:26:17,200 to show a lot of turbulence at the opening bell, that could very well mean that you've got the bulls 211 00:26:17,200 --> 00:26:22,560 coming back, and they're going to start scooping up every bargain they can find in sight. 212 00:26:26,160 --> 00:26:34,080 Enough of that. I've done what I can to talk about this. Now let me take you over here. And the first 213 00:26:34,080 --> 00:26:39,200 thing we're going to do, I'm going to bring up the target worksheet. And I am uploading this 214 00:26:39,200 --> 00:26:46,560 in your spreadsheets folder in Canvas. There's a subfolder, class examples, and this will all be 215 00:26:46,560 --> 00:26:52,800 in there. But you still need to be keeping an eye on what I'm doing here, so that you know what I'm 216 00:26:52,800 --> 00:26:59,920 doing and why I'm doing it. Now this is all, the first round of this is coming off the financial 217 00:26:59,920 --> 00:27:08,160 analysis ratios. This sheet, it's in your Canvas file folders, financial analysis ratios, and this 218 00:27:08,160 --> 00:27:14,400 is any ratio that I would care about that you would need to know. And there are even a few ratios in 219 00:27:14,400 --> 00:27:22,640 here for at least one other class that I will be teaching as well, short-term financial management. 220 00:27:22,640 --> 00:27:31,440 Specifically for short-term financial management, DSO, day sale outstanding, DIH, days inventory 221 00:27:31,440 --> 00:27:38,800 held, and DPO, days payable outstanding. These are core ratios in short-term financial management. 222 00:27:39,600 --> 00:27:49,280 And those three put together, you take DSO plus DIH minus DPO, and you get the holy grail of the 223 00:27:49,280 --> 00:27:57,760 CCC, the cash conversion cycle, which is, it's just like one of those hugely important things 224 00:27:57,760 --> 00:28:02,080 in short-term financial management. If you get into that kind of stuff, that's corporate, 225 00:28:03,360 --> 00:28:08,800 not investments, but it also crosses into investments, short-term investments. 226 00:28:08,800 --> 00:28:16,800 But anyway, these are the ones that I would care about. Some of those, 227 00:28:19,200 --> 00:28:25,920 I mean some of them are really popular. They go in cycles. The ratios right now, EBITDA 228 00:28:27,600 --> 00:28:36,240 is just a big thing, EBITDA or whatever they call it. And any ratio that has EBITDA in it 229 00:28:36,240 --> 00:28:41,680 is important these days. And I'll show you right here where I'm looking at. Where the hell is it? 230 00:28:44,480 --> 00:28:46,080 Where is EBITDA? 231 00:28:48,800 --> 00:28:51,120 Don't tell me I don't have it in here somewhere. 232 00:28:53,440 --> 00:29:02,000 Ha! I'll be darned. I gotta fix that. I need to fix that. I'm gonna have to put in another, 233 00:29:02,000 --> 00:29:11,520 oh there it is. There it is. EBITDA coverage. That is a, technically that's debt management, 234 00:29:11,520 --> 00:29:16,720 but it's also considered a liquidity ratio in some textbooks. That's why I was looking over there 235 00:29:17,280 --> 00:29:24,640 around the liquidity and profitability. Essentially, EBITDA, operating income, 236 00:29:24,640 --> 00:29:32,240 divided by interest expense is your times interest earned. So if I were to take 237 00:29:36,080 --> 00:29:37,440 times interest earned, 238 00:29:41,680 --> 00:29:46,400 and this is just in the book, so rather in my sheet, and it's in the book too, 239 00:29:46,400 --> 00:29:58,400 so I'm not putting anything new on there. That's EBIT over interest expense. Now EBIT also is known 240 00:29:58,400 --> 00:30:05,440 as operating income, or operating profit. Okay, that is a measure of how many times over you can 241 00:30:05,440 --> 00:30:10,640 pay your interest expense. You do not ever want to have that below one because that means you're in 242 00:30:10,640 --> 00:30:17,280 default on an interest payment. That's the end. That's end game. Chapter 11, protection. However, 243 00:30:17,280 --> 00:30:41,600 the one that where you would put it as EBITDA, this part is your depreciation and amortization. 244 00:30:41,600 --> 00:30:49,760 In other words, you're adding back the expenses that didn't happen. Those are accounting. They are 245 00:30:49,760 --> 00:30:57,680 not real. You don't write a check to depreciation and amortization. Then you take that divided by 246 00:30:57,680 --> 00:31:07,120 your interest expense, and that is a better measure of your coverage for your interest. 247 00:31:07,120 --> 00:31:15,040 Because the EBIT is subtracting out something that doesn't exist. By putting it back into the 248 00:31:15,040 --> 00:31:25,440 operating income, you are making it what really, how much funds do you have really to cover your 249 00:31:25,440 --> 00:31:34,240 interest expense. That's why it's more popular now. The only downside of that is that some financial 250 00:31:34,240 --> 00:31:42,880 statements, the companies do not report on the income statement the depreciation and amortization. 251 00:31:43,360 --> 00:31:48,480 You're looking at this and you're saying, okay, is it still in there but they're just not putting 252 00:31:48,480 --> 00:31:58,400 it on its own line or is it not in there at all? In which case, it's not EBIT, it's EBITDA is what 253 00:31:58,400 --> 00:32:06,000 they're calling operating income. That's a mystery and it's something that's quite frustrating 254 00:32:06,000 --> 00:32:12,640 to financial analysts now. You didn't put in, and a lot of companies do, you didn't put in a line 255 00:32:12,640 --> 00:32:20,720 in your operating expenses, depreciation expense. Is it in there and you just buried it with SG&A 256 00:32:20,720 --> 00:32:33,200 or is it not in there? What you're talking about as EBIT is actually EBITDA. The accounting 257 00:32:33,200 --> 00:32:43,360 standards are basically silent on this issue. As far as I've looked and several others who are 258 00:32:43,360 --> 00:32:51,760 bothered by this have said, we don't find any place in the general accepted accounting principles, 259 00:32:51,760 --> 00:32:59,200 not standard principles, consistently applied. We don't find any guidance on whether or not you must 260 00:32:59,200 --> 00:33:07,840 put depreciation and amortization into your operating expenses. We're in the dark. Is it in 261 00:33:07,840 --> 00:33:14,000 there? Let me pull up something right here. I'm going to take this off the screen. I don't have 262 00:33:14,000 --> 00:33:22,640 to do that, I can just minimize it. Let's look at target. This is target. Consolidated statement of 263 00:33:22,640 --> 00:33:30,800 operations. Target is nice to us. They say, here it is. You can add it back in and you get EBITDA. 264 00:33:30,800 --> 00:33:38,640 You take your operating income and add back depreciation and amortization. We know what to 265 00:33:38,640 --> 00:33:45,520 do here. For that coverage ratio, we just add that back in. But there are a lot of companies, 266 00:33:45,520 --> 00:33:51,760 there is no line there. You are just on your own trying to figure out what to do on that one. 267 00:33:51,760 --> 00:34:01,120 Let me take this off to the side here just a second because it's going to get in the way here if I don't. 268 00:34:01,120 --> 00:34:14,160 Now, as you recall from last time, where the hell was I? Oh, I got to get that over there and get 269 00:34:14,160 --> 00:34:23,520 the financial statement up. Now, I was working my way through the ratios here and I had gotten down 270 00:34:23,520 --> 00:34:31,760 to return on equity. Basic earning power, which you can look at, is EBIT over total assets. So, 271 00:34:31,760 --> 00:34:39,680 the basic earnings power is equal to the, and if you want to follow along by all means, I will also 272 00:34:39,680 --> 00:34:48,560 again upload this. Once I've put some things in here, I will upload it. But what I want to do here 273 00:34:48,560 --> 00:34:58,960 is, what was I doing? Okay, total assets. Where the hell are my total assets? 274 00:34:58,960 --> 00:35:13,520 Where the hell are my total assets? Oh, there it is. Total assets divided by the, no, 275 00:35:17,040 --> 00:35:28,080 let me get off this. Basic earning power is EBIT over total assets equals EBIT over total assets. 276 00:35:28,080 --> 00:35:37,520 So, what we'll do is we'll take the operating income, EBIT, right there, divided by the total assets. 277 00:35:41,840 --> 00:35:44,320 Total assets, there it is. Okay. 278 00:35:44,320 --> 00:36:01,120 Put 1031. So, essentially, that is your operating income as a, sort of like a percent of your total 279 00:36:01,680 --> 00:36:11,840 assets. How much operating income did you generate from the total assets of the company? 280 00:36:11,840 --> 00:36:18,640 If the total assets are a giant portfolio, and I've used this example, this way of explaining it 281 00:36:18,640 --> 00:36:27,680 before, what operating income, that's your revenues minus your cost of goods sold, minus your operating 282 00:36:27,680 --> 00:36:35,840 costs, what was your return on that portfolio? In this case, it was about 10.31. Now, I don't 283 00:36:35,840 --> 00:36:42,400 know whether the book does it or not, but I would turn that into a percentage myself. 284 00:36:45,360 --> 00:36:56,240 Now, the equity multiplier. Total assets over equity. So, that one would equal, you're going 285 00:36:56,240 --> 00:37:04,240 to go to the balance sheet, and you're going to take your total assets divided by how much money 286 00:37:04,240 --> 00:37:10,240 the owners have put into the company. That would be total shareholders investment, they call it. 287 00:37:13,840 --> 00:37:19,040 So, in other words, how should I put this? 288 00:37:23,280 --> 00:37:30,000 You've got that equity that you put, your shareholders put in money, they bought stock. 289 00:37:30,000 --> 00:37:37,040 They also gave up dividends for the company to put that money back in to grow the company. 290 00:37:38,640 --> 00:37:48,080 How much did that work? In this case, they turned that money that belongs to the shareholders, 291 00:37:48,080 --> 00:37:58,480 they bought stock, they gave up dividends, that became a little more than four times as much 292 00:37:58,480 --> 00:38:07,600 as they put in. That's the best way to explain that. And the name of it is indicative. How much 293 00:38:07,600 --> 00:38:13,520 did they multiply what was put in there? Now, again, and I emphasize this over and over again, 294 00:38:14,240 --> 00:38:22,240 is that these numbers are relative. Is this a good number? Is it a bad number? Well, it's pretty 295 00:38:22,240 --> 00:38:32,000 obvious that if it's under one, that's bad. It actually deflated the owner's stake in the company. 296 00:38:32,000 --> 00:38:39,360 But here we have, it's been multiplied by about four. What numbers do I see? Anywhere from, well, 297 00:38:39,360 --> 00:38:48,400 I've seen under one, I saw a.7, I can't remember what it was last year, I hit a.7 on one company. 298 00:38:48,400 --> 00:38:59,360 But in general, it's usually around four, yeah, seven, ten, hell, a few times I've run into things 299 00:38:59,360 --> 00:39:08,160 like 30, 20, 30, where it really multiplied. The company was able to turn the shareholders' money 300 00:39:08,160 --> 00:39:16,720 into 10, 20 times as much in terms of total assets of the company. Now, you obviously can notice that 301 00:39:16,720 --> 00:39:24,240 this is highly sensitive to the leverage of the company. In other words, the more the company uses 302 00:39:24,240 --> 00:39:32,480 debt, the more the equity multiplier will be because total equity will be lower and that means 303 00:39:32,480 --> 00:39:41,680 that that will make the whole fraction larger. So that is, that gains to leverage in a ratio. 304 00:39:41,680 --> 00:39:48,880 The more debt you're using, the more assets you're going to own. If you use only your own equity, 305 00:39:49,440 --> 00:39:56,960 then you'll have a nice modest house on the outskirts of Decatur. But if you borrow tons of money, 306 00:39:57,840 --> 00:40:04,240 you'll have a couple of nice houses in some reputable place in Schomburg, or something like 307 00:40:04,240 --> 00:40:13,920 that, or Oakbrook. So that's what it is. Simply, the more debt you use, the bigger this multiplier 308 00:40:13,920 --> 00:40:20,960 is going to be. So that's a warning. Yeah, bigger is better, but you're taking leverage and that 309 00:40:20,960 --> 00:40:27,600 creates risk. The more debt you take on, the riskier your corporation is going to be simply 310 00:40:27,600 --> 00:40:32,400 because you've got a bigger interest expense. So you have to have a bigger operating income to pay 311 00:40:32,400 --> 00:40:39,280 that bigger interest expense. So your revenue, you don't want that to go up and down and up and down 312 00:40:39,280 --> 00:40:46,720 because you could very well dip below the interest expense when you get to the operating income line. 313 00:40:46,720 --> 00:40:54,480 That's why leverage does cause you to have gains, but it also is at the cost of more risk. 314 00:40:54,480 --> 00:41:03,600 And let me do the dividend ratio. And this one, the dividend, I hope I can find it over here in 315 00:41:03,600 --> 00:41:09,120 the statement of cash flows. Statement of cash flows. There it is. Okay, I've got to watch it here 316 00:41:09,120 --> 00:41:13,520 because this is going to be a negative number and I really don't want it to be a negative number, 317 00:41:13,520 --> 00:41:24,640 so I'll have to do an absolute value after I finish this. The dividends divided by the net income. 318 00:41:24,640 --> 00:41:32,880 Where the hell is the net income? There we go. Net earnings. There we go. And that'll be a negative. 319 00:41:32,880 --> 00:41:44,240 Let me fix that and make that a positive by doing an absolute value. ABS. Nope, don't want to do it there. 320 00:41:45,840 --> 00:41:57,120 Want it one over. A absolute value of that top number. Well, I could do it at the bottom of the 321 00:41:57,120 --> 00:42:06,080 whole thing if I wanted to. Okay, and then the plow back ratio is one minus that. 322 00:42:09,440 --> 00:42:16,880 Well, try that again. Equals one minus the dividend ratio. 323 00:42:16,880 --> 00:42:31,360 So, Target, this is Target, yeah. Target gave of what the owners claim, net income, Target gave 324 00:42:32,000 --> 00:42:45,280 about 48.6% of it back to its shareholders. It kept 51% for itself, for the company to grow 325 00:42:45,280 --> 00:42:52,560 the stockholders value. Now, let me do something here. These are generally considered, 326 00:42:53,600 --> 00:43:00,720 and I don't know how your book puts it, but I don't recall, but usually a percentage. You notice that 327 00:43:00,720 --> 00:43:10,000 Target gives a lot of its, what belongs to the shareholders, back to them. It is a very high 328 00:43:10,000 --> 00:43:16,800 dividend company. It gives a lot back. Now, what does that mean? It could mean a couple of things. 329 00:43:17,360 --> 00:43:24,240 Target is just generous with its shareholders. Another darker side of that is that Target 330 00:43:25,200 --> 00:43:33,120 doesn't have really all that many positive net present values projects that it wants to pursue. 331 00:43:33,120 --> 00:43:39,280 So, it says, here shareholders, you can do more with your money than we can. That's the 332 00:43:39,280 --> 00:43:45,120 downside of giving big dividends away. It's almost a signal. Target doesn't have anything 333 00:43:45,120 --> 00:43:49,680 it can do with that net income. So, it gives about half of it back to the shareholders 334 00:43:49,680 --> 00:43:58,080 and keeps only about half of it to grow the company. That's a managerial, well, it's not 335 00:43:58,080 --> 00:44:10,320 a managerial. It's a board of directors choice. Now, let me copy these and paste them over here. 336 00:44:10,320 --> 00:44:19,120 And then we can get a clearer look. Basic earning power has jumped for this company. It really has. 337 00:44:20,000 --> 00:44:26,960 And surprisingly though, the equity multiplier has eased back up a little bit. 338 00:44:26,960 --> 00:44:34,160 That's a little odd, but you know, it is what it is. Now, notice that the dividend ratio has gone 339 00:44:34,160 --> 00:44:44,880 down. They gave away in 2023, well, that's 2022-23, they gave back to the shareholders 66% 340 00:44:46,000 --> 00:44:55,280 of what they made for them, keeping only about 34% for the company to grow. And apparently, 341 00:44:55,280 --> 00:45:03,840 they definitely backed off that in this year quite a bit. But still, it's very big. And 342 00:45:04,800 --> 00:45:10,480 you know, it is what it is. Clearly, they didn't want to share it. They shared a little bit too 343 00:45:10,480 --> 00:45:18,480 aggressively. So now, let me go on here a little bit. I've done the liquidity and the profitability. 344 00:45:18,480 --> 00:45:30,720 Now, I want to talk here a minute about the debt management ratios. Now, under debt management, 345 00:45:30,720 --> 00:45:40,320 you have debt to total assets. Now, one thing about this, this is our most direct measure of 346 00:45:40,320 --> 00:45:48,560 leverage. This is capital structure. Now, capital structure is a combination of debt and equity 347 00:45:49,120 --> 00:45:56,560 that comprises total assets. Capital structure is a combination of debt and equity that comprises 348 00:45:56,560 --> 00:46:05,200 total assets. The higher that number is, the more leveraged the company is. The lower that number is, 349 00:46:05,200 --> 00:46:12,720 the less leveraged the company is. In general, the greater the leverage measured by debt to total 350 00:46:12,720 --> 00:46:19,920 assets, the riskier the company is, just as a general rule. It's relying more and more on debt 351 00:46:20,800 --> 00:46:29,360 and less and less on equity for its daily bread. And then, of course, you have the classic times 352 00:46:29,360 --> 00:46:52,720 interest earned. And then, you have your EBITDA coverage. Now, going back up here, debt to total 353 00:46:52,720 --> 00:46:59,920 assets. Now, when we do debt to total assets, generally speaking, and I think the book does this 354 00:46:59,920 --> 00:47:11,680 too, you look only at your long-term debt and other borrowings. You don't bother the other ones. 355 00:47:12,560 --> 00:47:19,120 For one thing, they're relatively minimal. And the other thing is, we're focusing only on the big 356 00:47:19,120 --> 00:47:25,520 800-pound bondholders, those sons of bitches who can put us out of business if we don't make them 357 00:47:25,520 --> 00:47:36,640 happy. So, in a case like this, we're going to take long-term debt divided by total assets. 358 00:47:39,440 --> 00:47:47,760 This company has a capital structure that's 27% debt and therefore approximately 73% equity. 359 00:47:47,760 --> 00:48:00,560 So, it is a relatively low-leveraged, unleveraged company. You see about 25.75 debt to equity. 360 00:48:00,560 --> 00:48:09,840 That's your standard for a low-leveraged company. You get up there 50, 70, 30. That's high leverage. 361 00:48:09,840 --> 00:48:15,760 But in this case, debt to total assets of.2695. Now, times interest earned, you're going to take 362 00:48:15,760 --> 00:48:22,800 that operating income right there. Where the hell is it? Right there. And you're going to divide it 363 00:48:22,800 --> 00:48:38,160 by your interest expense. 11 times. This is a relatively large number. You like this. You get 364 00:48:38,160 --> 00:48:48,080 really fussy if it gets below four, three. At seven, you're okay. You're comfortable. Ten. Now, at 11, 365 00:48:48,960 --> 00:48:55,360 things like this, and I've seen some of the big corporations are 20. They can pay their interest 366 00:48:55,360 --> 00:49:01,840 expense more than 11 times over with the money that's available to pay interest expense. 367 00:49:01,840 --> 00:49:08,640 Some would argue that that might be a little too high. They're obviously in no danger of default 368 00:49:08,640 --> 00:49:17,840 whatsoever. But they could actually take on more debt in their capital structure and still be able 369 00:49:17,840 --> 00:49:26,720 to pay their interest. And they'd have a stronger basic earning power and all that. Whatever. Their 370 00:49:26,720 --> 00:49:33,680 managerial choice, their management and board of directors chooses to have a lot of distance 371 00:49:34,560 --> 00:49:41,680 between them and default on any debt obligation. So now if we look at the EBITDA, we do the same 372 00:49:41,680 --> 00:49:53,680 thing. But this time what we do is we take operating income. Where the heck? Oh, there it is. 373 00:49:53,680 --> 00:50:01,040 And we add back the depreciation and amortization expense. Right there. 374 00:50:07,200 --> 00:50:18,080 Okay. And then we divide that by your interest expense, net interest expense right there. 375 00:50:18,080 --> 00:50:26,560 Net interest expense right there. And that's even healthier. That's big. So realistically they can 376 00:50:26,560 --> 00:50:36,240 pay their interest expense every year 16 times over. 16 times over. So no pain there. And let 377 00:50:36,240 --> 00:50:46,320 me copy those numbers over. Well, I'm going to put this as a percentage. It really doesn't matter. 378 00:50:46,320 --> 00:50:58,480 But now let me copy these numbers over here. So you notice something interesting. One, a couple 379 00:50:58,480 --> 00:51:07,680 of things. One, Target has become less leveraged. It has backed away from leverage. In other words, 380 00:51:07,680 --> 00:51:14,960 it's paid off debt and it hasn't generated and it hasn't issued new debt. So it's 381 00:51:14,960 --> 00:51:21,520 becoming safer. That should lower the beta for one thing. It lowers the risk of the company. 382 00:51:21,520 --> 00:51:26,320 They're paying a big dividend. That should lower the risk of the company. So they have a lot of 383 00:51:26,320 --> 00:51:32,480 factors that indicate a lower beta. And then if you look at times interest earned, 384 00:51:35,600 --> 00:51:43,520 this makes sense because they lowered their debt load and so they have less interest to pay. So 385 00:51:43,520 --> 00:51:49,360 their times interest earned has gone up. They are obviously pulling away from risk. Target is 386 00:51:49,360 --> 00:51:56,800 becoming an old mature company and that's not that unusual. Back in my time, Target was new and wild, 387 00:51:56,800 --> 00:52:05,120 a crazy thing. And now it's becoming one of the old men of the retail business. And it's doing a 388 00:52:05,120 --> 00:52:14,400 good job. Now obviously EBITDA is going to follow suit on that. Now going over here to asset activity, 389 00:52:14,400 --> 00:52:26,080 I have a few problems with asset activity. Here, that's going to drive me crazy, I think. Average 390 00:52:26,080 --> 00:52:40,640 collection period. Now this is a problem for Target. Simply because if I look over here at their 391 00:52:40,640 --> 00:52:52,720 balance sheet, I've got no accounts receivable to put in the formula. So that's Target's trick. They 392 00:52:52,720 --> 00:52:58,320 have all their accounts receivable in a captive that is not being reported on their consolidated 393 00:52:58,320 --> 00:53:06,080 financial statements. You would actually have to go into the 10K for God's sake to find the number. 394 00:53:06,640 --> 00:53:14,080 It will be in item 7, management discussion and analysis of the results of operations. It's there, 395 00:53:14,800 --> 00:53:21,040 but for God's sake, I mean, that's about the only place. Now I can go over here and check 396 00:53:21,040 --> 00:53:36,800 in the statement of cash flows. God, it's not... Tell me if I'm not seeing it. Nope. They don't even 397 00:53:36,800 --> 00:53:46,800 report it there. Son of a bitch. Okay, we can't do it. And that, you know, I mean, if I did that, 398 00:53:46,800 --> 00:53:52,400 the SEC would make me some hard timers old lady at a federal facility, but apparently 399 00:53:53,600 --> 00:54:01,760 they could get by with it, you know, whatever. Okay, enough of that. But I can do... Nope, 400 00:54:01,760 --> 00:54:07,840 I can't do day sales outstanding either because that needs... 401 00:54:07,840 --> 00:54:16,640 That needs it too. Whoops, I didn't mean to do that. 402 00:54:19,280 --> 00:54:28,320 Day sales outstanding. I can't do that one either because I don't have their accounts receivable. 403 00:54:28,320 --> 00:54:42,320 Okay, try something out. Oh, total asset turnover. Finally, total asset turnover. And the next one is 404 00:54:42,320 --> 00:55:06,320 total fixed asset turnover. And then inventory turnover. And finally, day's inventory held. 405 00:55:12,320 --> 00:55:18,320 And then day's payable outstanding. 406 00:55:28,640 --> 00:55:34,080 At least I can get these down here. Total asset turnover. Now the total asset turnover is just 407 00:55:34,080 --> 00:55:45,760 going to be your net sales divided by your total assets equals net sales divided by total assets. 408 00:55:45,760 --> 00:56:06,560 Right, there it is. In other words, if you consider the total assets as being sellable, 409 00:56:07,520 --> 00:56:14,320 you did it almost two times last year. Target did it almost two times last year. They sold their 410 00:56:14,320 --> 00:56:18,960 company two times. That's basically what it's saying. They sold their company two times. 411 00:56:20,000 --> 00:56:27,520 Now, what should that number be? I don't know. Total asset turnover. You can artificially 412 00:56:28,240 --> 00:56:35,760 increase it by letting your not replacing equipment, property, plant and equipment, 413 00:56:35,760 --> 00:56:42,000 letting it depreciate. In other words, letting total assets become smaller will increase your 414 00:56:42,000 --> 00:56:48,880 total asset turnover ratio. It's not healthy. So if you see this as a big number, four, six, 415 00:56:49,520 --> 00:56:54,720 you look at the pattern of how they are, of what's happening with their fixed assets. Now, 416 00:56:54,720 --> 00:57:00,320 I'm going to look at their fixed asset turnover ratio right now. The fixed asset turnover is going 417 00:57:00,320 --> 00:57:07,040 to be the same thing, net sales over net fixed assets equals in this case, your net sales 418 00:57:07,040 --> 00:57:11,040 over your net fixed assets. 419 00:57:19,040 --> 00:57:25,040 Who's this? Right here. Your property and equipment net. 420 00:57:25,040 --> 00:57:38,480 Okay. Now, I'm dying. I'm sorry. I'm going to have to pull this over here. I want to see what happened. 421 00:57:42,160 --> 00:57:50,560 Not much. Not much. See, if this number were to jump on me, I'd be worried. They're not replacing. 422 00:57:50,560 --> 00:57:55,360 But in this case, it looks like they are having some capital investment. That's good news. Good 423 00:57:55,360 --> 00:58:03,760 news there. Okay. So now, and it eroded a little bit on total assets. That was because fixed assets 424 00:58:03,760 --> 00:58:12,720 increased. So the total asset turnover decreased. Now, inventory turnover. Now, the inventory 425 00:58:12,720 --> 00:58:21,280 turnover ratio, you're just going to take your cost of goods sold equals cost of goods sold, 426 00:58:23,920 --> 00:58:30,480 cost of sales divided by your inventory. Come back over here, divided by inventory. 427 00:58:30,480 --> 00:58:43,360 They turned their, everything in their inventory, they wiped out and replaced a little more than 428 00:58:43,360 --> 00:58:51,280 once every two months. 6.5 times a year. That would tell me that a little more than twice 429 00:58:52,160 --> 00:58:59,760 every two months, a little less than twice a year. They completely rolled over their inventory. 430 00:58:59,760 --> 00:59:10,240 Now, in that number is healthy. If it gets too low, you're holding a lot of inventory. If it gets too 431 00:59:10,240 --> 00:59:17,360 high, you're probably going toward a just-in-time system. That's great, but it's not great if you 432 00:59:17,360 --> 00:59:27,120 get a bottleneck in your supply chain. There was an obsession in the 2000s to get that inventory 433 00:59:27,120 --> 00:59:33,760 turnover ratio up. Get the inventory in, get it on the shelves, get it sold, bring in more, do it again, 434 00:59:33,760 --> 00:59:42,960 faster and faster. That turned into an absolute fiasco when the supply chain broke down in 2021 435 00:59:42,960 --> 00:59:49,120 and 2022 because they were selling it out of the inventory as fast as they could get it on the 436 00:59:49,120 --> 00:59:56,880 shelves and get it past the cash register. Then, okay, more toilet paper, more eggs, more everything. 437 00:59:56,880 --> 01:00:05,760 The supplier said, don't got none. Wait, what? Yeah, you were selling, you had so short, 438 01:00:05,760 --> 01:00:12,400 your inventory was so tight that when there was a breakdown in the supply chain, you had sold what 439 01:00:12,400 --> 01:00:18,160 you had. You had small warehouses and so you sold everything in the warehouses thinking, well, 440 01:00:18,160 --> 01:00:22,560 I'll just order more. We've got all these formulas for when you trigger the order inventory. That's 441 01:00:22,560 --> 01:00:28,800 what I do in FIL 340. Knowing your trigger and you tighten them as much as you can, 442 01:00:29,680 --> 01:00:36,640 bring in a little bit, set your trigger low so that you trigger with 100 units left and then you 443 01:00:36,640 --> 01:00:42,960 order two days, you got your inventory full and then you sell it off. Well, that turned into an 444 01:00:42,960 --> 01:00:48,960 absolute disaster when the supply chains broke down. That's why you had empty storage shelves 445 01:00:48,960 --> 01:00:54,400 with toilet paper, other basic goods because they were rolling the inventory so fast, 446 01:00:55,200 --> 01:01:03,680 they didn't have any backup in their inventory. There was none. Matter of fact, there was a joke 447 01:01:03,680 --> 01:01:09,440 and I thought it was a joke, but it wasn't. There were actually toilet paper brokers who were 448 01:01:09,440 --> 01:01:15,040 finding giant stashes of inventory and selling them to the highest bidding company to get it 449 01:01:15,040 --> 01:01:22,720 onto their shelves. Days inventory held, let me do this, DIH. The days inventory held, you're 450 01:01:22,720 --> 01:01:30,240 going to take your average inventory and you're going to divide that by your cost of goods sold. 451 01:01:30,240 --> 01:01:39,280 Now, this one is a little bit tricky to do. Your average inventory. The way we do this 452 01:01:39,280 --> 01:01:47,520 is I'm going to do it this way. I'm not sure. I'm going to take this year. 453 01:01:49,600 --> 01:01:57,120 Whoops, let me back off here. I'm going to take equals the average 454 01:01:59,760 --> 01:02:02,640 of the past two years 455 01:02:02,640 --> 01:02:10,240 and divide that by the cost of goods sold. 456 01:02:15,760 --> 01:02:21,760 I made a mistake there. I should have put, let me kill this. I'm going to have to do a 457 01:02:21,760 --> 01:02:32,640 divide it by here. Let me delete that. Open parentheses. Cost of goods sold over 365. Cost 458 01:02:32,640 --> 01:02:54,880 of sales. Well, cost of sales over 365 to make it a daily. 365 and then close the parentheses. 459 01:02:54,880 --> 01:03:05,040 Almost 60 days they held inventory. That would be considered an embarrassingly high number by a lot 460 01:03:05,040 --> 01:03:18,000 of companies these days. Where you see 20, 10, 5, certainly no more than 25. Target had inventory, 461 01:03:18,000 --> 01:03:25,120 its average piece of inventory was sitting in a warehouse for two months. Now, the downside of 462 01:03:25,120 --> 01:03:33,440 that is opportunity cost. You have to pay for the inventory space and all that for that two months 463 01:03:34,160 --> 01:03:40,160 instead of for a couple of days. That creates its own cost, the inventory. You have big warehouses. 464 01:03:40,160 --> 01:03:46,720 You have to have security on those. Heating, lights, all that kind of stuff. You have to have 465 01:03:46,720 --> 01:03:52,320 security on those. You have to have security on those. So that's considered not a good idea. 466 01:03:52,320 --> 01:04:00,000 Plus, holding that inventory that long, inventory held, is inventory not sold. That's an old thing. 467 01:04:00,000 --> 01:04:07,040 Inventory held is inventory not sold. Most analysts would say this sucks. This is way too big. 468 01:04:07,040 --> 01:04:14,880 But we'll see here in a minute. I can do this number, I think I can, but that other one, 469 01:04:16,160 --> 01:04:23,760 well look at that. That looks like policy. That wasn't a fluke, that's policy. They don't move 470 01:04:23,760 --> 01:04:31,600 inventory fast. If I see it for one year and then it's a big difference the next year or something 471 01:04:31,600 --> 01:04:37,520 like that, you know that they saw a problem and they were fixing it. Here, they're not fixing any 472 01:04:37,520 --> 01:04:45,840 problem at all. This is what they do. And DPO, let me do the DPO here real quick and then I'll finish. 473 01:04:45,840 --> 01:04:53,040 We'll do the rest on Thursday. But DPO, days payable, average accounts payable divided by, so 474 01:04:53,040 --> 01:05:03,600 this one equals the average of accounts payable. So I'll look for the accounts payable. 475 01:05:04,560 --> 01:05:11,680 I said I'll look for the accounts payable. The average of those two, close the parenthesis, 476 01:05:11,680 --> 01:05:25,440 divided by cost of goods sold over 365. So we go back over to cost of goods sold divided by 365. 477 01:05:27,040 --> 01:05:36,160 Close the parenthesis and hope to God that it works. Well there we go. That's actually a very 478 01:05:36,160 --> 01:05:45,680 large number. The golden number that you usually see is something around 30. 30 days. 479 01:05:47,680 --> 01:05:57,040 Okay, because most vendors say 30 days net. You have to pay your bill within 30 days. So a lot of 480 01:05:57,040 --> 01:06:05,680 companies you see it around 30 days. This is actually a good thing. They delay paying their 481 01:06:05,680 --> 01:06:12,640 bills. That's a cash management strategy. And I'll finish you with this. This is from FIL 340. 482 01:06:14,080 --> 01:06:21,920 The cash conversion cycle. You want this to be low. How fast you bring cash around back to you. 483 01:06:21,920 --> 01:06:27,920 From ordering an inventory, through making the sale, getting paid for the sale, and then on the 484 01:06:27,920 --> 01:06:40,720 other side the days payable outstanding. So this is your days of sale outstanding, DSO, plus days 485 01:06:40,720 --> 01:06:50,240 inventory held, minus days payable outstanding. So you notice that the higher your days payable 486 01:06:50,240 --> 01:06:59,600 outstanding, the lower your cash conversion cycle number is. So companies try. They try to make these 487 01:06:59,600 --> 01:07:07,760 small and this one big. Ouch, God damn. Okay, that is most companies management strategy. Now the 488 01:07:07,760 --> 01:07:16,640 ultimate in, I don't know how you would put it, in financial short-term spontaneous financing is 489 01:07:16,640 --> 01:07:25,440 Walmart. Walmart has a negative cash conversion cycle, which means that their suppliers are 490 01:07:26,000 --> 01:07:33,680 doing their short-term financing for them. And that's masterful. You want this number to be low, 491 01:07:33,680 --> 01:07:41,840 but Walmart takes it to the extreme. They literally have a negative cash conversion. So that negative 492 01:07:41,840 --> 01:07:48,560 is how much money their suppliers are financing them. How do they do it? They don't pay their 493 01:07:48,560 --> 01:07:57,760 suppliers for 90 days about. The ultimate, well what if you're a supplier to Walmart and they say 494 01:07:57,760 --> 01:08:03,280 well you know we'd like to have you pay in 30 days. Walmart says yeah you'll get a check in a few 495 01:08:03,280 --> 01:08:08,240 months. That's how Walmart does it. So what are you going to do? Well Mr. Walmart you better pay us or 496 01:08:08,240 --> 01:08:13,760 you're not going to be our customer anymore. Oh yeah sure you're going to do that. And they also, 497 01:08:13,760 --> 01:08:21,280 their DSO is very, is pretty low because most of its cash retail sales and their days inventory 498 01:08:21,280 --> 01:08:26,800 held. That's a relatively large number because they've got just insanely large warehouses they 499 01:08:26,800 --> 01:08:31,360 hold things in. But overall that's what you're seeing here. Now I'm going to save this sheet 500 01:08:32,000 --> 01:08:36,880 and then we'll finish it up with common size financial statements on Thursday. That's all I 501 01:08:36,880 --> 01:08:38,880 have for you. I thank you.