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Alan Cring Productions in association with 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, Common Size Financial Statements and this is a relatively straightforward topic.

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It's simple to do in Excel and it is some of the meat and potatoes of financial analysis in general.

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It's not anything that requires a PhD, but it does require that you think about what you're doing.

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It's like ratios. You can calculate ratios as often as you want any day of the week in Excel.

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It's interpreting it that is the important part.

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Now, one thing that I'll say in this regard is that I have written more than my share of chat GPTs

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and I've used some that are out there.

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And something I've found is that you can have a chat GPT if it's properly configured.

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Do financial analysis. Do ratio analysis and Common Size Financial Statements analysis.

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It either is good or it is terrible.

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One of the things you always have to watch out for with AIs is that they'll bluff.

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They'll give authoritative information. They'll cite sources that look reputable and all of that.

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They'll even show you how they did the calculations and they're wrong. They're just plain wrong.

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And that is a big problem. It was hilarious because OpenAI was bragging yesterday in a big press release

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that it has now partnered with one of the very large banks in Italy to provide artificial intelligence solutions

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to all of their finance matters.

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And so anyone who's worked with OpenAI like I have just has to say, oh, this is a big mistake.

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They're going to calculate loan payments wrong. They'll be calculating interest rates, interest payments,

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interest payments wrong. That's what OpenAI does. That's what those GPTs are notorious for.

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So it's not my problem.

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But before we do that, a quick look at the numbers just to see how the markets are doing today.

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We still have, the markets are still, I didn't want to do that, the markets are still on edge right now.

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And what's really scary right now is that we haven't seen a response to the attacks that Iran did several days ago on Israel.

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That, I mean, our judgment is that means that whatever's going to come, it's going to be hell on earth.

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They're not going to, Israel's not going to sit back, but it may just be sitting there waiting, just letting Iran sweat and panic.

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And then they're just going to lay in. And then you get the oil embargo. Look here.

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Look at crude. Crude is pulling now. War premium is beginning to bake into it. And that's bad news.

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The oil traders, they have their fingers on the pulse of the world.

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Every rumor, every fart, everything that you could imagine about oil, that's what is in those those prices at any given moment.

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The latest information is in that price and the price is moving upward.

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It's back in the old 72 to 79 trading band and it is just rocking upward.

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You notice that now, again, and I emphasize this to your finance people, know what the time frame is.

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When you're looking at like a spark chart, the time frame on that crude oil is not the same time frame as the S&P 500 or the Dow.

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Those time frames are from the opening to the closing out here in central time, 830 to what is it, 330 or something like that.

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That's not the time frame for oil. That's not the time frame for gold, silver commodities have their own time frame.

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Some of them start in the middle of the night and end for 20 hours later, whatever.

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So know that the time frames are different. So whatever was going on, this pop right here looks like it was in the early morning.

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Before that, it was just kind of rumbling along there and then something spooked the market early this morning.

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I could look at the news and see was there something that came across the news wires or anything like that that indicates that the war is getting close, one way or the other.

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Now if you look at the S&P 500, the Dow, and the NASDAQ, they are, notice the vol, the volatility.

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It is bouncing every which way, bulls, bears, kangaroos, and maybe a few aardvarks in there.

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It's just all over the place and it's biased to the bear side, but it's just all over the place.

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Now here's one that's really just drives me up a wall.

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Look at the 10-year bond. The yield just keeps going up. For God's sake, quit it.

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You want to say to them, but that safe harbor, which interestingly enough, if the yield is going up, the price is going down.

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So that means that the investors are getting out of the safe harbor of bonds.

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Well, what the heck is that all about? Where's the money going? It sure as hell not going into stocks right now.

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So you have definitive disinvestment from bonds, but you do not have a mirroring definitive investment in equities.

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So the question is, where's the money going? And the answer is probably the cash.

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Just keep pulling money out and putting it into cash. As a matter of fact, for God's sake, don't take my investment advice worth anything.

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But right now I'm pulling out of all of my equities and my bonds and I'm just moving into money markets right now.

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Because the big dogs are doing it and I'm sure as hell not going to think I know more than they do about what's going on out there.

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If they're heading to their mattresses to stuff cash under it, well, hell, I'll head under my orthopedic mattress and stuff cash there too.

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So that's the thinking of a survivor in this business that we're in.

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And there's an old saying in the Army, we had it, beware of the old man in a business where men die young.

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So watch the old traders, what they're doing. These guys who are getting out of stocks, getting out of bonds, putting the money into money markets,

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they're the traders who have survived. And so they probably know what they're doing.

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But anyway, now here's another part of this equation too.

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You have the, well, this one's a little complicated.

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The dollar really took a plunge in valuation, devalued.

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But then it's come back up some and if you look at the, against the Euro, dollar against Euro,

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if you look over here at the pound against the dollar, it took a plunge and then it just stopped plunging.

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So it found an equilibrium, a little bit different from the pattern of the Euro to the dollar.

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Now if you look over here at the yen, you're going to see where the hell is the yen.

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There it is. It has been, the dollar has been depreciating against the yen.

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It works backward to normal currencies because yen are such a tiny fraction of a value to a dollar, they turn the number around.

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So that is actually a depreciation of the dollar, not an appreciation because it's backward to these.

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They're all, the Euro, the pound and the yen are all going in the same direction vis-a-vis the dollar in all of these.

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Okay, now going over here, the Nikkei. It popped at the beginning and then it just floated.

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And it drives me up a wall. Sometimes you'll see it drop at the beginning and then it'll float.

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Last night it popped at the beginning and then it floated.

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It seems to be a thing over there. They do all their trading before the bell.

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They put in their orders and then after that they all just sit there and watch the market just drift from that initial energy that was put in with the information.

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Now if you look at the FTSE, that's an interesting pattern because it was bullish until about noon over there and then it just dropped right off again.

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It lost all the gains it had made through the morning and so news looks kind of bad.

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I'm just looking over here real quick to see if there's any pattern that's similar over here.

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Dow and the S&P. Kind of interesting. Almost a reverse. Well, yeah, I don't know.

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It looks like we had a recovery there about midday but then it died off. Now just a quick look at the vol.

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Oh, jeez. Yeah. Look how pathetic that volume is versus the typical day over the last year.

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The players are just getting out and they're not trading. They're just sitting there.

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That's just really, that's almost scary kind of low volume when you got $1.1 billion and you're well more than halfway through the trading day.

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And the typical trading day is over $3.8 billion. You can see the volume was heavy in the morning but then it's been dying off as the day goes along.

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As fewer and fewer traders are doing anything. They did their stuff at the beginning and then it's just kind of slowly drying up as the day goes along.

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I don't know. Let me go back here to the top.

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Huh, that's interesting. I don't see something I was expecting to see. Just out of curiosity.

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Look at CBOE volatility. Look at that. Positive movement in momentum and volatility.

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And it looks like it's getting more, the volatility is getting more volatile. If the second derivative and all of that.

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You see how it's just suddenly started to just whip up and down. Now notice that this is a futures contract.

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Do you see how its behavior, its timeline is different from a stocks?

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Do you see that right? The time frame is out to here to 3pm I guess. Maybe not.

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But it starts at a different time and it ends at a different time from your normal stocks.

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So if you're going to be more of a generalist in learning how to trade, you do have to appreciate that the whole world doesn't trade on opening and closing bells on the New York Stock Exchange.

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A lot of these markets you can't even really say, well where does this happen?

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How many of you, and I wanted to ask this before I go on. How many of you have actually been up to the CBOE?

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Have any of you? Okay, I'd like to arrange a trip for you. I'll tell you a story. You repeat this, I will shoot you.

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But about 6-7 years ago it's been, we had a new young professor he just started and he wanted to be involved in ISSF.

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Now at that time old man Joe Trefsker and old man Alan Crane were running ISSF. And we planned these trips to meet corporate people,

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go to different big companies up in Chicagoland and have the executives give us little talks and we get you network, get your resumes to the people and all that.

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Well one time, no no no, the young professor said no no, I want us to go to the board of trade and see the action,

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actually see all the pits with the people doing the open outcry, the open cry and all that, yelling at each other, doing the hand signals.

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And I don't know how Joe felt about it, Trefsker, but I said, you really want to do that? Yeah, okay, we'll do it.

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Well here we went, it's like a hallway into a sports arena. You know you could pretend you're a wrestler in the WWE hearing the people cheering as you go in.

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And our tour guide, he gave us a big promotion. This is how it works and he showed us how hand signals work and the open cry system.

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And it was all exciting, everyone was ready for this awesome thing that was going to happen.

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Well we walked in down this long hallway and we kept waiting to hear, they kept waiting to hear all the yelling.

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There was no yelling, no sound, dead, silent. And then we walked out into the arena with all the pits, black, no lights.

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There was only one pit that was having activity. All of these others, dozens of other pits, nothing was going on.

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There wasn't anyone there. The stadium, there's stadium seating all around.

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And you had a few people sitting in the stadium seats on their computers playing games and looking at naughty videos and all that, but that was it.

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And while I knew what was going to happen, we were not going to see anything there because all of those pits had become computerized.

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They were all computerized. There were no people there anymore. No one needed to be there.

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You had a supervisor of the pit or some trader was hanging around. The only pit that was open was the options trading pit.

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And the reason that was open is because those idiots do options chains that are so long that the computers at that time couldn't figure out what the hell they were doing.

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You had the legend of the 17 chain option. Options on options on options on options.

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And of course, the question finally came around to what the hell is the underlying? Hell, I don't know.

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In fact, in that particular case, they never found what was the underlying that was that created the chain.

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Because the underlying that had created the chain had expired.

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So everything else along the chain did not have an anchor in an actual asset that had created the chain.

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But anyway, that was the only pit that was open. It was it was hilarious.

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Okay, so that was disappointing to everyone. And then we walked around the pit, all the pits in the stadium.

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And there was this court, another corridor. And then we went back there. And there was where the fun was.

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The futures traders and you had all the lights were running and all the trades, all the prices and all that.

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It was gorgeous. It was glorious, just like the old days. But from what I've heard, that's gone now, too.

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I don't know. I haven't been up there into that area since then. But that's what it is.

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You can see those. And that's all day, all night, because something is trading at all times.

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You got cats coming from the suburbs into on the on the L at three in the morning to get in on the opening of their commodity that they trade at 4 a.m.

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Some are dragging themselves in at 6 p.m. because their trading begins at 7 p.m. So that is a clocking market.

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Anyway, a little bit of background for you on futures markets. A little different.

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Now, again, if you want to play if you want to play vol, you go for the VXX. And there are some others.

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I know there are others, but the VXX. It's an ETN. Now, an ETN and an ETF are not the same thing.

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They look the same. They smell the same. They quack the same. But they're not the same duck.

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And this ETNs are actually a lot more complicated than ETFs. ETFs are actually very simple inside.

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They're just a freaking portfolio of stocks. Now, they can be a leverage portfolio.

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You've got to watch that because an ETF can juice itself with futures in the same stocks to make it so that it's not a one times.

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It's a two times or a three times. Let me show you something here. Let me see if TQQ.

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Nope. Let me see one of these over here. Soxil. UPRO. Let me see UPRO.

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Nope, they're not showing. Some of these are actually multipliers.

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In other words, the volatility or the price movements of the underlying portfolio are magnified

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because you're also trading futures contracts on those portfolios as well.

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And so when the price moves, yeah, the stock moves that price, but also the futures contracts jump or drop.

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So that's what creates the multiplier, the magnifier effect in those two times and three times ETFs.

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But ETNs are a different animal entirely. Underneath, you trade them like ETFs.

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They seem to look like ETFs, but they aren't ETFs. They're much more complicated inside.

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I saw an article. It might have been in Forbes, but someone was trying to, he obviously knew what he was doing,

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but he was trying to simplify what happens inside an ETN. And it was just like, even at that simpler level,

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I was looking at seeing the wheels on the bus go round and round. I had no idea what the hell he was talking about.

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But yeah, just be aware, if you're in an ETN, it's a more complex animal.

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And this VXX, I want to go to VXX here. Yeah. See how it's, you're playing volatility.

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Vol has gone up today, so you're going to make money off the VXX.

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So you can play pure vol of the market if that's your game.

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And you win if the vol increases, and you lose if the vol calms down.

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So that's another thing that you can think about. In this course, again, I've warned you about this before.

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I try to throw in more than just, all right, let's find a present value and a future value.

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I try to give you more of a sense of where you are going and what the possibilities and what the world is like out there in our profession.

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And it's your profession. You've made the mistake of stepping onto the dark side, and now you're in the program.

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So live with it a little bit. Now, I want to get to the base of the lecture today.

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But in order to do that, I'm going to look at two companies. The first one I'm going to look at is Colgate-Palmolive.

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Yeah, it sucks today. One way or the other. Don't really care.

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We're just going to have a quick look at it. Low beta stock.

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About reasonably valued, and it's a profitable company, and it pays a reasonable dividend, about 2%.

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It doesn't suck. It's a nice company, and it's a long haul.

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It's a big, big company. You see the market cap is $82 billion on it.

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You know, it's one of the big ones of the earth.

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Now, the other one, Procter & Gamble.

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And I'm picking two that are about the same SIC code.

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Okay, although they don't, you're not supposed to talk about SIC anymore. They got this new thing that they have.

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Okay, you can see that Procter & Gamble is larger than Colgate-Palmolive.

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You see that? But they have about the same beta, the same risk level.

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Both of them are near intrinsic. If you take 30 to be intrinsic.

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And this one is profitable. It's more profitable than Colgate, but they're still both profitable.

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Its dividend is a little bit more generous than Colgate's, but they're in the same league.

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Now, the reason I take these two is because they are in the same basic business overall.

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They do different things, but one is smaller than the other.

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The Procter & Gamble is about five times the size of Colgate-Palmolive.

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So you've got asymmetry in the numbers themselves in the financial statements.

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Okay, you've got asymmetry in the financial statements.

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As far as the actual, the absolute numbers are concerned.

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Now, the next thing we're going to do here is I'm going to go over to sec.gov.

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And we're going to pull up the financials of these two companies.

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Search filings. And the first one is Colgate-Palmolive.

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And I'm going to pull up their most recent 10K filing.

185
00:23:55,600 --> 00:24:10,600
So, little blue button and download the Excel sheet for it.

186
00:24:10,600 --> 00:24:13,600
Now it'll say enable editing and all that good stuff.

187
00:24:13,600 --> 00:24:16,600
Okay, so now we've gotten that one up.

188
00:24:16,600 --> 00:24:24,600
Now let me go back here and I'm going to back, going back to the SEC.

189
00:24:24,600 --> 00:24:30,600
And I'm going to pull up Procter & Gamble.

190
00:24:30,600 --> 00:24:36,600
On the 10K, whoa, they, oh, they're, oh, I hate companies like this.

191
00:24:36,600 --> 00:24:45,600
Okay, you see that the K is very recent because they just finished their fiscal year, 2024.

192
00:24:45,600 --> 00:24:48,600
And some companies have calendar fiscal.

193
00:24:48,600 --> 00:24:52,600
Some companies have fiscal years that are just absolutely weird.

194
00:24:52,600 --> 00:24:56,600
I can't remember. It's one of the big companies. I may have even shown it to you.

195
00:24:56,600 --> 00:25:02,600
Their fiscal 2024 ended in February of 2024.

196
00:25:02,600 --> 00:25:08,600
So they're now in their fiscal 2025. But it doesn't matter for our analysis here.

197
00:25:08,600 --> 00:25:15,600
But we're going to pull up this filing and we're going to go to the blue button here.

198
00:25:15,600 --> 00:25:23,600
Happy days and view the Excel document.

199
00:25:23,600 --> 00:25:32,600
And now we will have Procter & Gamble.

200
00:25:32,600 --> 00:25:35,600
Let me grab and drag. I'm just going to do two.

201
00:25:35,600 --> 00:25:40,600
The statement of earnings, the profit and loss statement or the income statement.

202
00:25:40,600 --> 00:25:45,600
And then I don't want that one. I want the balance sheet.

203
00:25:45,600 --> 00:25:49,600
Come on. Why do they put the, there we go.

204
00:25:49,600 --> 00:25:54,600
So I'm going to drag that thing over here and put it next to the statement of earnings.

205
00:25:54,600 --> 00:25:58,600
So I have these two next to each other for our purposes.

206
00:25:58,600 --> 00:26:02,600
And then I'm going to come over here to Colgate, Palmolive.

207
00:26:02,600 --> 00:26:05,600
And I'm going to do the same thing, consolidated statement.

208
00:26:05,600 --> 00:26:12,600
And then I'm going to try to find the balance sheet.

209
00:26:12,600 --> 00:26:17,600
Okay. So there it is. So I'm going to grab that balance sheet.

210
00:26:17,600 --> 00:26:19,600
Nope. That one.

211
00:26:19,600 --> 00:26:26,600
I'm going to drag its butt over here so that it is next to its income statement.

212
00:26:26,600 --> 00:26:29,600
So we've got the two lined up together.

213
00:26:29,600 --> 00:26:33,600
Got some statements that we care about in the same positions.

214
00:26:33,600 --> 00:26:41,600
And now let's go, well, do I have Colgate? Which one do I have for God's sake?

215
00:26:41,600 --> 00:26:47,600
Okay. I can get this. Cover. Yeah, this is Colgate.

216
00:26:47,600 --> 00:26:55,600
Okay. Now, the next thing that I'm going to do here is I'm going to put in two sheets.

217
00:26:55,600 --> 00:27:01,600
One right after the income statement.

218
00:27:01,600 --> 00:27:05,600
Insert a worksheet.

219
00:27:05,600 --> 00:27:23,600
And this is common size income statement.

220
00:27:23,600 --> 00:27:28,600
And then I'm going to come over a little further.

221
00:27:28,600 --> 00:27:37,600
And I'm going to add a sheet right after the balance sheet.

222
00:27:37,600 --> 00:27:51,600
And this one will be the common size balance sheet.

223
00:27:51,600 --> 00:27:57,600
This is just tedious. This is just basically stenography work.

224
00:27:57,600 --> 00:28:07,600
Okay, so now I want to do the same thing over here for Colgate-Palmala.

225
00:28:07,600 --> 00:28:11,600
Or rather, yeah. One of them. I don't know.

226
00:28:11,600 --> 00:28:21,600
Okay, anyway. So I'm going to insert a common size income statement.

227
00:28:21,600 --> 00:28:38,600
And I'm going to put in a common size balance sheet.

228
00:28:38,600 --> 00:29:05,600
Might as well start with the one I'm on right here.

229
00:29:05,600 --> 00:29:08,600
Okay, common size balance sheet.

230
00:29:08,600 --> 00:29:13,600
Now, here's the thing that I want to accomplish.

231
00:29:13,600 --> 00:29:24,600
I want to take the lines of the income statement and divide every one by net sales.

232
00:29:24,600 --> 00:29:30,600
So I'm going to look here. And I'm at A4.

233
00:29:30,600 --> 00:29:35,600
So I'm going to want to start my work here on A4.

234
00:29:35,600 --> 00:29:46,600
And the first thing that I'll see here is that C4 is the net sales.

235
00:29:46,600 --> 00:29:57,600
So I'm going to start by saying equals C4 divided by C4 as an absolute reference.

236
00:29:57,600 --> 00:30:03,600
So in other words, as I drag it across and drag it down, I'm sorry, drag it down.

237
00:30:03,600 --> 00:30:12,600
But if I want to be a little more sophisticated about it, I will not put the dollar sign on the C.

238
00:30:12,600 --> 00:30:20,600
So that as I drag it horizontally, it tracks the years.

239
00:30:20,600 --> 00:30:29,600
Whoa, I did that wrong. I wanted to be in C4. I'm sorry, C4.

240
00:30:29,600 --> 00:30:40,600
There we go. Equals C4 slash C dollar 4.

241
00:30:40,600 --> 00:30:44,600
That should be 100%. My ass, what do you mean?

242
00:30:44,600 --> 00:30:49,600
Equals, let's try it again.

243
00:30:49,600 --> 00:31:05,600
Net sales divided by net sales with a dollar on the 4.

244
00:31:05,600 --> 00:31:09,600
Whoops. There we go.

245
00:31:09,600 --> 00:31:15,600
Now I'm going to make that a percentage. Let's say two decimal places.

246
00:31:15,600 --> 00:31:23,600
In other words, revenue divided by revenue is, okay, so now then I'm going to drag it over.

247
00:31:23,600 --> 00:31:29,600
Let's try that again.

248
00:31:29,600 --> 00:31:32,600
So that we get the years done.

249
00:31:32,600 --> 00:31:37,600
I'll put in headers later. I just want to get through this very quickly with you.

250
00:31:37,600 --> 00:32:00,600
Now very quickly I'm going to go over here and I'm going to bring it down to 16s, to row 16.

251
00:32:00,600 --> 00:32:07,600
There's your common size.

252
00:32:07,600 --> 00:32:10,600
And then I can fill in the other information here.

253
00:32:10,600 --> 00:32:28,600
Like for example, I might want to do this on 1 through 3.

254
00:32:28,600 --> 00:32:35,600
And go out to E.

255
00:32:35,600 --> 00:32:40,600
Whoa, that didn't work as well as I thought it would.

256
00:32:40,600 --> 00:32:47,600
Well, I really don't care too much.

257
00:32:47,600 --> 00:32:50,600
I've never seen spill before. What the hell?

258
00:32:50,600 --> 00:32:54,600
Oh well, I'm not going to worry too much about it.

259
00:32:54,600 --> 00:32:59,600
The main game here is just to get the dates in.

260
00:32:59,600 --> 00:33:11,600
Okay, C2 equals C2.

261
00:33:11,600 --> 00:33:17,600
Equals that.

262
00:33:17,600 --> 00:33:26,600
And then we can drag it over here.

263
00:33:26,600 --> 00:33:28,600
Okay, there's your common size.

264
00:33:28,600 --> 00:33:31,600
So the income statement.

265
00:33:31,600 --> 00:33:39,600
Now for the balance sheet, we want to use total assets as the pivot.

266
00:33:39,600 --> 00:33:44,600
So we'll have total assets at B16.

267
00:33:44,600 --> 00:33:47,600
So I'll start there.

268
00:33:47,600 --> 00:33:53,600
B16 right there.

269
00:33:53,600 --> 00:34:06,600
Equals B16 that divided by that with a dollar sign on the 16,

270
00:34:06,600 --> 00:34:11,600
so I can scoot it over.

271
00:34:11,600 --> 00:34:16,600
Make that a 100% again.

272
00:34:16,600 --> 00:34:19,600
And then drag it over.

273
00:34:19,600 --> 00:34:25,600
And then I'm going to drag it up.

274
00:34:25,600 --> 00:34:33,600
You'll get a couple in there that were, there were blanks

275
00:34:33,600 --> 00:34:34,600
for the two years.

276
00:34:34,600 --> 00:34:37,600
And then I'll drag it down.

277
00:34:37,600 --> 00:34:40,600
How far down should I drag it?

278
00:34:40,600 --> 00:34:47,600
I'm going to drag it down here too.

279
00:34:47,600 --> 00:34:56,600
I'm going to go to 35.

280
00:34:56,600 --> 00:34:59,600
What happened there?

281
00:34:59,600 --> 00:35:03,600
Oh, that's, no, what, what?

282
00:35:03,600 --> 00:35:05,600
Oh, I see, okay.

283
00:35:05,600 --> 00:35:14,600
Drag it down to 35.

284
00:35:14,600 --> 00:35:16,600
And you've got some blanks in there too.

285
00:35:16,600 --> 00:35:24,600
I'll just get rid of those very quickly.

286
00:35:24,600 --> 00:35:29,600
So those are the common sizes of the one company.

287
00:35:29,600 --> 00:35:34,600
I lost track of which one I was doing there.

288
00:35:34,600 --> 00:35:40,600
But this turns everything into percent of assets on the balance sheet,

289
00:35:40,600 --> 00:35:45,600
and it turns everything into a percent of revenues or sales on the income statement.

290
00:35:45,600 --> 00:35:48,600
Now let me go over and get to the other one.

291
00:35:48,600 --> 00:35:49,600
What was this one?

292
00:35:49,600 --> 00:35:55,600
This one was Procter & Gamble.

293
00:35:55,600 --> 00:35:58,600
Those numbers didn't look that normal.

294
00:35:58,600 --> 00:36:00,600
So now I'm going to get over here,

295
00:36:00,600 --> 00:36:06,600
and I'm going to do the common size income statement for the other company.

296
00:36:06,600 --> 00:36:09,600
So I'll just do the same thing that I did here.

297
00:36:09,600 --> 00:36:13,600
I'm going to say, okay, I'm at A, I'm at B4,

298
00:36:13,600 --> 00:36:16,600
so we put ourselves in B4,

299
00:36:16,600 --> 00:36:31,600
and we say equals that slash that with an absolute reference on the 4.

300
00:36:31,600 --> 00:36:37,600
And then we turn it into a percent,

301
00:36:37,600 --> 00:36:41,600
and then we drag it over,

302
00:36:41,600 --> 00:36:46,600
and now I'm going to quickly look here to see how far down.

303
00:36:46,600 --> 00:36:51,600
I want to go down to B15.

304
00:36:51,600 --> 00:36:53,600
B15.

305
00:36:53,600 --> 00:36:58,600
This tediousness of this, I'm sure I could do it more efficiently,

306
00:36:58,600 --> 00:37:00,600
but there you go.

307
00:37:00,600 --> 00:37:04,600
Okay, so now we can go over here to the balance sheet

308
00:37:04,600 --> 00:37:09,600
and have some fun over there, the common size balance sheet.

309
00:37:09,600 --> 00:37:13,600
We're going to begin with the total assets.

310
00:37:13,600 --> 00:37:17,600
That is on line 13, B13,

311
00:37:17,600 --> 00:37:22,600
so I will say B13, I'm going to bring it over to B13,

312
00:37:22,600 --> 00:37:24,600
and I'm going to do the same thing.

313
00:37:24,600 --> 00:37:32,600
Equals total assets divided by total assets

314
00:37:32,600 --> 00:37:41,600
with a dollar sign to hold the column in place.

315
00:37:41,600 --> 00:37:44,600
And just like the other one, I turn it into a percentage,

316
00:37:44,600 --> 00:37:46,600
two decimal places, I prefer.

317
00:37:46,600 --> 00:37:50,600
Then we pull it over, and then we bring it up.

318
00:37:50,600 --> 00:37:52,600
How far up do I want to bring this?

319
00:37:52,600 --> 00:37:59,600
I want to bring it up to 3 maybe.

320
00:37:59,600 --> 00:38:03,600
Yeah, 3 maybe.

321
00:38:03,600 --> 00:38:09,600
So I'll bring it up to 3, row 3.

322
00:38:09,600 --> 00:38:11,600
There we go.

323
00:38:11,600 --> 00:38:12,600
And then I'll drag it down.

324
00:38:12,600 --> 00:38:14,600
How far down do I want to drag it?

325
00:38:14,600 --> 00:38:16,600
I want to get to shareholder's equity.

326
00:38:16,600 --> 00:38:19,600
They've got a more complex structure.

327
00:38:19,600 --> 00:38:24,600
That would be 35 again.

328
00:38:24,600 --> 00:38:26,600
Okay, 35.

329
00:38:26,600 --> 00:38:31,600
So I'll take it down to 35.

330
00:38:31,600 --> 00:38:37,600
And finally, and I'll get rid of some of these

331
00:38:37,600 --> 00:38:42,600
blank rows that were in here.

332
00:38:42,600 --> 00:38:44,600
Okay, finally.

333
00:38:44,600 --> 00:38:47,600
Now we can actually look at some things here.

334
00:38:47,600 --> 00:38:51,600
Let's look at the common size income statement.

335
00:38:51,600 --> 00:38:56,600
I probably should put these in there.

336
00:38:56,600 --> 00:39:03,600
Equals that.

337
00:39:03,600 --> 00:39:08,600
And then take that down.

338
00:39:08,600 --> 00:39:11,600
Okay, finally on that one.

339
00:39:11,600 --> 00:39:15,600
So there's the income statement for the one company.

340
00:39:15,600 --> 00:39:17,600
And now we're going to do the common size income

341
00:39:17,600 --> 00:39:19,600
statement for the other company.

342
00:39:19,600 --> 00:39:24,600
And again, I'm probably going to have to go over here.

343
00:39:24,600 --> 00:39:30,600
Okay, so I want to go right there.

344
00:39:30,600 --> 00:39:38,600
Equals that.

345
00:39:38,600 --> 00:39:43,600
And then drag it down to the bottom.

346
00:39:43,600 --> 00:39:48,600
Okay, so now we've got common sizes for the two companies.

347
00:39:48,600 --> 00:39:53,600
And we can flip back and forth and look at them.

348
00:39:53,600 --> 00:39:57,600
The first one, of course, would be net earnings,

349
00:39:57,600 --> 00:40:02,600
which is gross, which is net margin for the two companies.

350
00:40:02,600 --> 00:40:05,600
So we've got the net margin here.

351
00:40:05,600 --> 00:40:08,600
And then we can flip over to the other company.

352
00:40:08,600 --> 00:40:16,600
And we can look at the net margin here.

353
00:40:16,600 --> 00:40:27,600
And we see the two companies in contrast.

354
00:40:27,600 --> 00:40:33,600
17th net margin has stayed fairly stable around 17.

355
00:40:33,600 --> 00:40:35,600
Well, it dropped a little bit.

356
00:40:35,600 --> 00:40:41,600
But it's around just under 18% net margin for the,

357
00:40:41,600 --> 00:40:48,600
which one is this, for Procter & Gamble.

358
00:40:48,600 --> 00:40:51,600
Okay, good.

359
00:40:51,600 --> 00:41:05,600
So now we go over to Colgate and we look at its net margin.

360
00:41:05,600 --> 00:41:07,600
Much lower.

361
00:41:07,600 --> 00:41:11,600
Colgate is not nearly as strong on the net margin.

362
00:41:11,600 --> 00:41:14,600
And you can go up and down the list here.

363
00:41:14,600 --> 00:41:17,600
One thing, look at, for example,

364
00:41:17,600 --> 00:41:22,600
look at selling general and administrative expenses.

365
00:41:22,600 --> 00:41:29,600
We've got for Colgate about very stable at about 36.5.

366
00:41:29,600 --> 00:41:31,600
A little bit of a bump there.

367
00:41:31,600 --> 00:41:37,600
Now if we go over here and have a look at selling general

368
00:41:37,600 --> 00:41:45,600
and administrative expenses, you've got in the upper 20s.

369
00:41:45,600 --> 00:41:49,600
So clearly, Procter & Gamble has a,

370
00:41:49,600 --> 00:41:55,600
I think that's Procter & Gamble, isn't it?

371
00:41:55,600 --> 00:42:03,600
Yeah, Procter & Gamble has a lower cost structure than Colgate does.

372
00:42:03,600 --> 00:42:09,600
Upper 20s, well, mid to upper 20s for Procter & Gamble,

373
00:42:09,600 --> 00:42:16,600
for Colgate, much higher.

374
00:42:16,600 --> 00:42:21,600
That is directly correlated with the lower net income

375
00:42:21,600 --> 00:42:24,600
of Colgate than Procter & Gamble.

376
00:42:24,600 --> 00:42:27,600
And you can go through very quickly here.

377
00:42:27,600 --> 00:42:30,600
I don't want to spend too much time.

378
00:42:30,600 --> 00:42:31,600
You can look at these yourself.

379
00:42:31,600 --> 00:42:33,600
I'm going to upload this.

380
00:42:33,600 --> 00:42:36,600
And you can tweak it as you wish, of course, obviously.

381
00:42:36,600 --> 00:42:41,600
But one thing to have a look at is the,

382
00:42:41,600 --> 00:42:44,600
this is making sure that I'm right here about what it is

383
00:42:44,600 --> 00:42:46,600
that I'm looking at.

384
00:42:46,600 --> 00:42:50,600
This is Colgate.

385
00:42:50,600 --> 00:42:55,600
Look at, for example, if I want to, let me go over here.

386
00:42:55,600 --> 00:42:58,600
This is Colgate.

387
00:42:58,600 --> 00:43:02,600
So if I look at Colgate, oh, I want to do this.

388
00:43:02,600 --> 00:43:14,600
Equals the same thing over here.

389
00:43:14,600 --> 00:43:16,600
You can drag this down.

390
00:43:16,600 --> 00:43:20,600
And you can get some information off here, too.

391
00:43:20,600 --> 00:43:24,600
The ones that you want to pay most attention to,

392
00:43:24,600 --> 00:43:27,600
for example, is leverage.

393
00:43:27,600 --> 00:43:33,600
Long-term debt as a percent of total assets right here.

394
00:43:33,600 --> 00:43:37,600
You've got, this is a highly leveraged company.

395
00:43:37,600 --> 00:43:42,600
Over 50%, notice how they've paid it down a little bit.

396
00:43:42,600 --> 00:43:44,600
They were up there, well, you're at 50%.

397
00:43:44,600 --> 00:43:48,600
Above 50%, you're getting into a seriously leveraged

398
00:43:48,600 --> 00:43:50,600
risk-profiled company.

399
00:43:50,600 --> 00:43:54,600
Now, which the hell one was that?

400
00:43:54,600 --> 00:43:58,600
Cover.

401
00:43:58,600 --> 00:43:59,600
That was Colgate.

402
00:43:59,600 --> 00:44:04,600
Colgate is heavily leveraged, a highly leveraged company.

403
00:44:04,600 --> 00:44:08,600
So that is kind of an interesting thing right there.

404
00:44:08,600 --> 00:44:09,600
Let me get over here.

405
00:44:09,600 --> 00:44:11,600
Now, let's look at Paul Moller,

406
00:44:11,600 --> 00:44:14,600
at Procter & Gamble.

407
00:44:14,600 --> 00:44:15,600
You've got a high leveraged company.

408
00:44:15,600 --> 00:44:18,600
Now let's go over here and get...

409
00:44:18,600 --> 00:44:22,600
And I'm going to have to put,

410
00:44:22,600 --> 00:44:26,600
copy those numbers in over here.

411
00:44:26,600 --> 00:44:28,600
Common size.

412
00:44:28,600 --> 00:44:32,600
Okay, so...

413
00:44:32,600 --> 00:44:36,600
Equals...

414
00:44:36,600 --> 00:44:42,600
That.

415
00:44:42,600 --> 00:44:46,600
Come down.

416
00:44:46,600 --> 00:44:52,600
Clear down.

417
00:44:52,600 --> 00:44:56,600
And you can see for long-term debt,

418
00:44:56,600 --> 00:44:58,600
look at that.

419
00:44:58,600 --> 00:45:01,600
Very different companies.

420
00:45:01,600 --> 00:45:05,600
Colgate-Palmolive is heavily leveraged.

421
00:45:05,600 --> 00:45:11,600
Procter & Gamble is very typical.

422
00:45:11,600 --> 00:45:15,600
20-25% is a very typical, normal,

423
00:45:15,600 --> 00:45:17,600
low-leveraged company.

424
00:45:17,600 --> 00:45:20,600
So Colgate, the smaller company,

425
00:45:20,600 --> 00:45:22,600
has a lower net margin.

426
00:45:22,600 --> 00:45:25,600
They are substantially more heavily,

427
00:45:25,600 --> 00:45:28,600
highly leveraged than Palmolive.

428
00:45:28,600 --> 00:45:31,600
And you can go through one after the other of the lines

429
00:45:31,600 --> 00:45:35,600
and look at all of the different differences,

430
00:45:35,600 --> 00:45:37,600
the different differences in policy.

431
00:45:37,600 --> 00:45:41,600
For example, now...

432
00:45:41,600 --> 00:45:44,600
I don't know why I'm having such a hard time remembering

433
00:45:44,600 --> 00:45:46,600
what the hell company I'm doing here.

434
00:45:46,600 --> 00:45:47,600
Procter & Gamble.

435
00:45:47,600 --> 00:45:48,600
Now let me go over here.

436
00:45:48,600 --> 00:45:49,600
Procter & Gamble.

437
00:45:49,600 --> 00:45:50,600
Just one more.

438
00:45:50,600 --> 00:45:52,600
Humor me.

439
00:45:52,600 --> 00:45:56,600
Notice that their cash position.

440
00:45:56,600 --> 00:46:01,600
That's actually kind of a relatively modest

441
00:46:01,600 --> 00:46:03,600
cash position.

442
00:46:03,600 --> 00:46:07,600
Let's take it over here to...

443
00:46:13,600 --> 00:46:15,600
Colgate-Palmolive.

444
00:46:15,600 --> 00:46:17,600
They are much...

445
00:46:17,600 --> 00:46:19,600
They keep much less cash.

446
00:46:19,600 --> 00:46:22,600
5% versus 7.5%.

447
00:46:22,600 --> 00:46:25,600
That's a noticeable lower,

448
00:46:25,600 --> 00:46:30,600
noticeably lower liquidity on the cash end of the company.

449
00:46:30,600 --> 00:46:33,600
So Colgate-Palmolive, higher leverage,

450
00:46:33,600 --> 00:46:38,600
lower net margin, lower liquidity.

451
00:46:38,600 --> 00:46:39,600
One last one.

452
00:46:39,600 --> 00:46:42,600
Just humor me.

453
00:46:42,600 --> 00:46:45,600
Colgate-Palmolive's inventories

454
00:46:45,600 --> 00:46:47,600
has a percent of total assets.

455
00:46:47,600 --> 00:46:57,600
And now let's go over here.

456
00:46:57,600 --> 00:47:06,600
5% versus 11.

457
00:47:06,600 --> 00:47:09,600
12%.

458
00:47:09,600 --> 00:47:13,600
So we've got a Colgate-Palmolive.

459
00:47:13,600 --> 00:47:17,600
Has heavily invested in inventories

460
00:47:17,600 --> 00:47:20,600
compared to its competitor.

461
00:47:20,600 --> 00:47:25,600
That means that you could be fooled about the liquidity

462
00:47:25,600 --> 00:47:28,600
if you look at just the current ratio.

463
00:47:28,600 --> 00:47:32,600
Colgate-Palmolive has less cash,

464
00:47:32,600 --> 00:47:34,600
but it has higher inventories,

465
00:47:34,600 --> 00:47:39,600
so its total current assets could look very similar

466
00:47:39,600 --> 00:47:42,600
to Procter & Gamble's.

467
00:47:42,600 --> 00:47:47,600
And yet, true liquidity, which is just your cash,

468
00:47:47,600 --> 00:47:50,600
is telling a different story.

469
00:47:50,600 --> 00:47:53,600
Colgate-Palmolive is cash-poor.

470
00:47:53,600 --> 00:47:55,600
And this is...

471
00:47:55,600 --> 00:47:58,600
All this is evidence of a riskier company.

472
00:47:58,600 --> 00:48:00,600
Even though the betas look the same,

473
00:48:00,600 --> 00:48:04,600
I'm seeing two companies that are very different

474
00:48:04,600 --> 00:48:06,600
in terms of their risk profiles.

475
00:48:06,600 --> 00:48:09,600
Colgate-Palmolive keeps low liquidity.

476
00:48:09,600 --> 00:48:12,600
It has a lower net margin.

477
00:48:12,600 --> 00:48:15,600
It has a significantly higher amount

478
00:48:15,600 --> 00:48:19,600
of its current assets in inventory

479
00:48:19,600 --> 00:48:21,600
than its competitor.

480
00:48:21,600 --> 00:48:23,600
And this is...

481
00:48:23,600 --> 00:48:25,600
The ratios can tell you some of this,

482
00:48:25,600 --> 00:48:28,600
but these common-sized financial statements

483
00:48:28,600 --> 00:48:30,600
are a different view.

484
00:48:30,600 --> 00:48:32,600
And as you can see, what I was doing there,

485
00:48:32,600 --> 00:48:35,600
I'm seeing very, very different companies.

486
00:48:35,600 --> 00:48:39,600
Even though according to Yee-Haw Finance...

487
00:48:42,600 --> 00:48:45,600
These two companies don't look that much different.

488
00:48:45,600 --> 00:48:47,600
There's Procter & Gamble.

489
00:48:47,600 --> 00:48:51,600
Look at its profile, beta, price earnings,

490
00:48:51,600 --> 00:48:54,600
dividend, all that good stuff.

491
00:48:54,600 --> 00:48:58,600
And look at Colgate-Palmolive.

492
00:49:01,600 --> 00:49:04,600
About the same beta.

493
00:49:04,600 --> 00:49:07,600
Dearly Intrinsic Values looks the same.

494
00:49:07,600 --> 00:49:09,600
Profitable.

495
00:49:09,600 --> 00:49:11,600
Nice dividend.

496
00:49:11,600 --> 00:49:14,600
The numbers that you're seeing on the front end,

497
00:49:14,600 --> 00:49:15,600
don't tell the whole story.

498
00:49:15,600 --> 00:49:17,600
That's what we do in financial analysis.

499
00:49:17,600 --> 00:49:19,600
We go behind the curtain,

500
00:49:19,600 --> 00:49:21,600
and we pull the company apart

501
00:49:21,600 --> 00:49:23,600
in different ways, numerically,

502
00:49:23,600 --> 00:49:24,600
and in other ways, too,

503
00:49:24,600 --> 00:49:26,600
which I'll talk about later in the course.

504
00:49:26,600 --> 00:49:28,600
But that's the end of this lecture,

505
00:49:28,600 --> 00:49:30,600
and the lesson is,

506
00:49:30,600 --> 00:49:33,600
never stop until you've tortured every number

507
00:49:33,600 --> 00:49:34,600
until it confesses.

508
00:49:34,600 --> 00:49:36,600
That's all I have for you today.

509
00:49:36,600 --> 00:50:04,600
Thank you.