Alan Cring Productions in association with Emergent Light Studio presents
the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 341 for Autumn Semester 2024.
Today, Common Size Financial Statements and this is a relatively straightforward topic.
It's simple to do in Excel and it is some of the meat and potatoes of financial analysis in general.
It's not anything that requires a PhD, but it does require that you think about what you're doing.
It's like ratios. You can calculate ratios as often as you want any day of the week in Excel.
It's interpreting it that is the important part.
Now, one thing that I'll say in this regard is that I have written more than my share of chat GPTs
and I've used some that are out there.
And something I've found is that you can have a chat GPT if it's properly configured.
Do financial analysis. Do ratio analysis and Common Size Financial Statements analysis.
It either is good or it is terrible.
One of the things you always have to watch out for with AIs is that they'll bluff.
They'll give authoritative information. They'll cite sources that look reputable and all of that.
They'll even show you how they did the calculations and they're wrong. They're just plain wrong.
And that is a big problem. It was hilarious because OpenAI was bragging yesterday in a big press release
that it has now partnered with one of the very large banks in Italy to provide artificial intelligence solutions
to all of their finance matters.
And so anyone who's worked with OpenAI like I have just has to say, oh, this is a big mistake.
They're going to calculate loan payments wrong. They'll be calculating interest rates, interest payments,
interest payments wrong. That's what OpenAI does. That's what those GPTs are notorious for.
So it's not my problem.
But before we do that, a quick look at the numbers just to see how the markets are doing today.
We still have, the markets are still, I didn't want to do that, the markets are still on edge right now.
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.
That, I mean, our judgment is that means that whatever's going to come, it's going to be hell on earth.
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.
And then they're just going to lay in. And then you get the oil embargo. Look here.
Look at crude. Crude is pulling now. War premium is beginning to bake into it. And that's bad news.
The oil traders, they have their fingers on the pulse of the world.
Every rumor, every fart, everything that you could imagine about oil, that's what is in those those prices at any given moment.
The latest information is in that price and the price is moving upward.
It's back in the old 72 to 79 trading band and it is just rocking upward.
You notice that now, again, and I emphasize this to your finance people, know what the time frame is.
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.
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.
That's not the time frame for oil. That's not the time frame for gold, silver commodities have their own time frame.
Some of them start in the middle of the night and end for 20 hours later, whatever.
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.
Before that, it was just kind of rumbling along there and then something spooked the market early this morning.
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.
Now if you look at the S&P 500, the Dow, and the NASDAQ, they are, notice the vol, the volatility.
It is bouncing every which way, bulls, bears, kangaroos, and maybe a few aardvarks in there.
It's just all over the place and it's biased to the bear side, but it's just all over the place.
Now here's one that's really just drives me up a wall.
Look at the 10-year bond. The yield just keeps going up. For God's sake, quit it.
You want to say to them, but that safe harbor, which interestingly enough, if the yield is going up, the price is going down.
So that means that the investors are getting out of the safe harbor of bonds.
Well, what the heck is that all about? Where's the money going? It sure as hell not going into stocks right now.
So you have definitive disinvestment from bonds, but you do not have a mirroring definitive investment in equities.
So the question is, where's the money going? And the answer is probably the cash.
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.
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.
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.
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.
So that's the thinking of a survivor in this business that we're in.
And there's an old saying in the Army, we had it, beware of the old man in a business where men die young.
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,
they're the traders who have survived. And so they probably know what they're doing.
But anyway, now here's another part of this equation too.
You have the, well, this one's a little complicated.
The dollar really took a plunge in valuation, devalued.
But then it's come back up some and if you look at the, against the Euro, dollar against Euro,
if you look over here at the pound against the dollar, it took a plunge and then it just stopped plunging.
So it found an equilibrium, a little bit different from the pattern of the Euro to the dollar.
Now if you look over here at the yen, you're going to see where the hell is the yen.
There it is. It has been, the dollar has been depreciating against the yen.
It works backward to normal currencies because yen are such a tiny fraction of a value to a dollar, they turn the number around.
So that is actually a depreciation of the dollar, not an appreciation because it's backward to these.
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.
Okay, now going over here, the Nikkei. It popped at the beginning and then it just floated.
And it drives me up a wall. Sometimes you'll see it drop at the beginning and then it'll float.
Last night it popped at the beginning and then it floated.
It seems to be a thing over there. They do all their trading before the bell.
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.
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.
It lost all the gains it had made through the morning and so news looks kind of bad.
I'm just looking over here real quick to see if there's any pattern that's similar over here.
Dow and the S&P. Kind of interesting. Almost a reverse. Well, yeah, I don't know.
It looks like we had a recovery there about midday but then it died off. Now just a quick look at the vol.
Oh, jeez. Yeah. Look how pathetic that volume is versus the typical day over the last year.
The players are just getting out and they're not trading. They're just sitting there.
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.
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.
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.
I don't know. Let me go back here to the top.
Huh, that's interesting. I don't see something I was expecting to see. Just out of curiosity.
Look at CBOE volatility. Look at that. Positive movement in momentum and volatility.
And it looks like it's getting more, the volatility is getting more volatile. If the second derivative and all of that.
You see how it's just suddenly started to just whip up and down. Now notice that this is a futures contract.
Do you see how its behavior, its timeline is different from a stocks?
Do you see that right? The time frame is out to here to 3pm I guess. Maybe not.
But it starts at a different time and it ends at a different time from your normal stocks.
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.
A lot of these markets you can't even really say, well where does this happen?
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?
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.
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.
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,
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.
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,
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.
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.
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.
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.
And it was all exciting, everyone was ready for this awesome thing that was going to happen.
Well we walked in down this long hallway and we kept waiting to hear, they kept waiting to hear all the yelling.
There was no yelling, no sound, dead, silent. And then we walked out into the arena with all the pits, black, no lights.
There was only one pit that was having activity. All of these others, dozens of other pits, nothing was going on.
There wasn't anyone there. The stadium, there's stadium seating all around.
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.
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.
They were all computerized. There were no people there anymore. No one needed to be there.
You had a supervisor of the pit or some trader was hanging around. The only pit that was open was the options trading pit.
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.
You had the legend of the 17 chain option. Options on options on options on options.
And of course, the question finally came around to what the hell is the underlying? Hell, I don't know.
In fact, in that particular case, they never found what was the underlying that was that created the chain.
Because the underlying that had created the chain had expired.
So everything else along the chain did not have an anchor in an actual asset that had created the chain.
But anyway, that was the only pit that was open. It was it was hilarious.
Okay, so that was disappointing to everyone. And then we walked around the pit, all the pits in the stadium.
And there was this court, another corridor. And then we went back there. And there was where the fun was.
The futures traders and you had all the lights were running and all the trades, all the prices and all that.
It was gorgeous. It was glorious, just like the old days. But from what I've heard, that's gone now, too.
I don't know. I haven't been up there into that area since then. But that's what it is.
You can see those. And that's all day, all night, because something is trading at all times.
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.
Some are dragging themselves in at 6 p.m. because their trading begins at 7 p.m. So that is a clocking market.
Anyway, a little bit of background for you on futures markets. A little different.
Now, again, if you want to play if you want to play vol, you go for the VXX. And there are some others.
I know there are others, but the VXX. It's an ETN. Now, an ETN and an ETF are not the same thing.
They look the same. They smell the same. They quack the same. But they're not the same duck.
And this ETNs are actually a lot more complicated than ETFs. ETFs are actually very simple inside.
They're just a freaking portfolio of stocks. Now, they can be a leverage portfolio.
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.
It's a two times or a three times. Let me show you something here. Let me see if TQQ.
Nope. Let me see one of these over here. Soxil. UPRO. Let me see UPRO.
Nope, they're not showing. Some of these are actually multipliers.
In other words, the volatility or the price movements of the underlying portfolio are magnified
because you're also trading futures contracts on those portfolios as well.
And so when the price moves, yeah, the stock moves that price, but also the futures contracts jump or drop.
So that's what creates the multiplier, the magnifier effect in those two times and three times ETFs.
But ETNs are a different animal entirely. Underneath, you trade them like ETFs.
They seem to look like ETFs, but they aren't ETFs. They're much more complicated inside.
I saw an article. It might have been in Forbes, but someone was trying to, he obviously knew what he was doing,
but he was trying to simplify what happens inside an ETN. And it was just like, even at that simpler level,
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.
But yeah, just be aware, if you're in an ETN, it's a more complex animal.
And this VXX, I want to go to VXX here. Yeah. See how it's, you're playing volatility.
Vol has gone up today, so you're going to make money off the VXX.
So you can play pure vol of the market if that's your game.
And you win if the vol increases, and you lose if the vol calms down.
So that's another thing that you can think about. In this course, again, I've warned you about this before.
I try to throw in more than just, all right, let's find a present value and a future value.
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.
And it's your profession. You've made the mistake of stepping onto the dark side, and now you're in the program.
So live with it a little bit. Now, I want to get to the base of the lecture today.
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.
Yeah, it sucks today. One way or the other. Don't really care.
We're just going to have a quick look at it. Low beta stock.
About reasonably valued, and it's a profitable company, and it pays a reasonable dividend, about 2%.
It doesn't suck. It's a nice company, and it's a long haul.
It's a big, big company. You see the market cap is $82 billion on it.
You know, it's one of the big ones of the earth.
Now, the other one, Procter & Gamble.
And I'm picking two that are about the same SIC code.
Okay, although they don't, you're not supposed to talk about SIC anymore. They got this new thing that they have.
Okay, you can see that Procter & Gamble is larger than Colgate-Palmolive.
You see that? But they have about the same beta, the same risk level.
Both of them are near intrinsic. If you take 30 to be intrinsic.
And this one is profitable. It's more profitable than Colgate, but they're still both profitable.
Its dividend is a little bit more generous than Colgate's, but they're in the same league.
Now, the reason I take these two is because they are in the same basic business overall.
They do different things, but one is smaller than the other.
The Procter & Gamble is about five times the size of Colgate-Palmolive.
So you've got asymmetry in the numbers themselves in the financial statements.
Okay, you've got asymmetry in the financial statements.
As far as the actual, the absolute numbers are concerned.
Now, the next thing we're going to do here is I'm going to go over to sec.gov.
And we're going to pull up the financials of these two companies.
Search filings. And the first one is Colgate-Palmolive.
And I'm going to pull up their most recent 10K filing.
So, little blue button and download the Excel sheet for it.
Now it'll say enable editing and all that good stuff.
Okay, so now we've gotten that one up.
Now let me go back here and I'm going to back, going back to the SEC.
And I'm going to pull up Procter & Gamble.
On the 10K, whoa, they, oh, they're, oh, I hate companies like this.
Okay, you see that the K is very recent because they just finished their fiscal year, 2024.
And some companies have calendar fiscal.
Some companies have fiscal years that are just absolutely weird.
I can't remember. It's one of the big companies. I may have even shown it to you.
Their fiscal 2024 ended in February of 2024.
So they're now in their fiscal 2025. But it doesn't matter for our analysis here.
But we're going to pull up this filing and we're going to go to the blue button here.
Happy days and view the Excel document.
And now we will have Procter & Gamble.
Let me grab and drag. I'm just going to do two.
The statement of earnings, the profit and loss statement or the income statement.
And then I don't want that one. I want the balance sheet.
Come on. Why do they put the, there we go.
So I'm going to drag that thing over here and put it next to the statement of earnings.
So I have these two next to each other for our purposes.
And then I'm going to come over here to Colgate, Palmolive.
And I'm going to do the same thing, consolidated statement.
And then I'm going to try to find the balance sheet.
Okay. So there it is. So I'm going to grab that balance sheet.
Nope. That one.
I'm going to drag its butt over here so that it is next to its income statement.
So we've got the two lined up together.
Got some statements that we care about in the same positions.
And now let's go, well, do I have Colgate? Which one do I have for God's sake?
Okay. I can get this. Cover. Yeah, this is Colgate.
Okay. Now, the next thing that I'm going to do here is I'm going to put in two sheets.
One right after the income statement.
Insert a worksheet.
And this is common size income statement.
And then I'm going to come over a little further.
And I'm going to add a sheet right after the balance sheet.
And this one will be the common size balance sheet.
This is just tedious. This is just basically stenography work.
Okay, so now I want to do the same thing over here for Colgate-Palmala.
Or rather, yeah. One of them. I don't know.
Okay, anyway. So I'm going to insert a common size income statement.
And I'm going to put in a common size balance sheet.
Might as well start with the one I'm on right here.
Okay, common size balance sheet.
Now, here's the thing that I want to accomplish.
I want to take the lines of the income statement and divide every one by net sales.
So I'm going to look here. And I'm at A4.
So I'm going to want to start my work here on A4.
And the first thing that I'll see here is that C4 is the net sales.
So I'm going to start by saying equals C4 divided by C4 as an absolute reference.
So in other words, as I drag it across and drag it down, I'm sorry, drag it down.
But if I want to be a little more sophisticated about it, I will not put the dollar sign on the C.
So that as I drag it horizontally, it tracks the years.
Whoa, I did that wrong. I wanted to be in C4. I'm sorry, C4.
There we go. Equals C4 slash C dollar 4.
That should be 100%. My ass, what do you mean?
Equals, let's try it again.
Net sales divided by net sales with a dollar on the 4.
Whoops. There we go.
Now I'm going to make that a percentage. Let's say two decimal places.
In other words, revenue divided by revenue is, okay, so now then I'm going to drag it over.
Let's try that again.
So that we get the years done.
I'll put in headers later. I just want to get through this very quickly with you.
Now very quickly I'm going to go over here and I'm going to bring it down to 16s, to row 16.
There's your common size.
And then I can fill in the other information here.
Like for example, I might want to do this on 1 through 3.
And go out to E.
Whoa, that didn't work as well as I thought it would.
Well, I really don't care too much.
I've never seen spill before. What the hell?
Oh well, I'm not going to worry too much about it.
The main game here is just to get the dates in.
Okay, C2 equals C2.
Equals that.
And then we can drag it over here.
Okay, there's your common size.
So the income statement.
Now for the balance sheet, we want to use total assets as the pivot.
So we'll have total assets at B16.
So I'll start there.
B16 right there.
Equals B16 that divided by that with a dollar sign on the 16,
so I can scoot it over.
Make that a 100% again.
And then drag it over.
And then I'm going to drag it up.
You'll get a couple in there that were, there were blanks
for the two years.
And then I'll drag it down.
How far down should I drag it?
I'm going to drag it down here too.
I'm going to go to 35.
What happened there?
Oh, that's, no, what, what?
Oh, I see, okay.
Drag it down to 35.
And you've got some blanks in there too.
I'll just get rid of those very quickly.
So those are the common sizes of the one company.
I lost track of which one I was doing there.
But this turns everything into percent of assets on the balance sheet,
and it turns everything into a percent of revenues or sales on the income statement.
Now let me go over and get to the other one.
What was this one?
This one was Procter & Gamble.
Those numbers didn't look that normal.
So now I'm going to get over here,
and I'm going to do the common size income statement for the other company.
So I'll just do the same thing that I did here.
I'm going to say, okay, I'm at A, I'm at B4,
so we put ourselves in B4,
and we say equals that slash that with an absolute reference on the 4.
And then we turn it into a percent,
and then we drag it over,
and now I'm going to quickly look here to see how far down.
I want to go down to B15.
B15.
This tediousness of this, I'm sure I could do it more efficiently,
but there you go.
Okay, so now we can go over here to the balance sheet
and have some fun over there, the common size balance sheet.
We're going to begin with the total assets.
That is on line 13, B13,
so I will say B13, I'm going to bring it over to B13,
and I'm going to do the same thing.
Equals total assets divided by total assets
with a dollar sign to hold the column in place.
And just like the other one, I turn it into a percentage,
two decimal places, I prefer.
Then we pull it over, and then we bring it up.
How far up do I want to bring this?
I want to bring it up to 3 maybe.
Yeah, 3 maybe.
So I'll bring it up to 3, row 3.
There we go.
And then I'll drag it down.
How far down do I want to drag it?
I want to get to shareholder's equity.
They've got a more complex structure.
That would be 35 again.
Okay, 35.
So I'll take it down to 35.
And finally, and I'll get rid of some of these
blank rows that were in here.
Okay, finally.
Now we can actually look at some things here.
Let's look at the common size income statement.
I probably should put these in there.
Equals that.
And then take that down.
Okay, finally on that one.
So there's the income statement for the one company.
And now we're going to do the common size income
statement for the other company.
And again, I'm probably going to have to go over here.
Okay, so I want to go right there.
Equals that.
And then drag it down to the bottom.
Okay, so now we've got common sizes for the two companies.
And we can flip back and forth and look at them.
The first one, of course, would be net earnings,
which is gross, which is net margin for the two companies.
So we've got the net margin here.
And then we can flip over to the other company.
And we can look at the net margin here.
And we see the two companies in contrast.
17th net margin has stayed fairly stable around 17.
Well, it dropped a little bit.
But it's around just under 18% net margin for the,
which one is this, for Procter & Gamble.
Okay, good.
So now we go over to Colgate and we look at its net margin.
Much lower.
Colgate is not nearly as strong on the net margin.
And you can go up and down the list here.
One thing, look at, for example,
look at selling general and administrative expenses.
We've got for Colgate about very stable at about 36.5.
A little bit of a bump there.
Now if we go over here and have a look at selling general
and administrative expenses, you've got in the upper 20s.
So clearly, Procter & Gamble has a,
I think that's Procter & Gamble, isn't it?
Yeah, Procter & Gamble has a lower cost structure than Colgate does.
Upper 20s, well, mid to upper 20s for Procter & Gamble,
for Colgate, much higher.
That is directly correlated with the lower net income
of Colgate than Procter & Gamble.
And you can go through very quickly here.
I don't want to spend too much time.
You can look at these yourself.
I'm going to upload this.
And you can tweak it as you wish, of course, obviously.
But one thing to have a look at is the,
this is making sure that I'm right here about what it is
that I'm looking at.
This is Colgate.
Look at, for example, if I want to, let me go over here.
This is Colgate.
So if I look at Colgate, oh, I want to do this.
Equals the same thing over here.
You can drag this down.
And you can get some information off here, too.
The ones that you want to pay most attention to,
for example, is leverage.
Long-term debt as a percent of total assets right here.
You've got, this is a highly leveraged company.
Over 50%, notice how they've paid it down a little bit.
They were up there, well, you're at 50%.
Above 50%, you're getting into a seriously leveraged
risk-profiled company.
Now, which the hell one was that?
Cover.
That was Colgate.
Colgate is heavily leveraged, a highly leveraged company.
So that is kind of an interesting thing right there.
Let me get over here.
Now, let's look at Paul Moller,
at Procter & Gamble.
You've got a high leveraged company.
Now let's go over here and get...
And I'm going to have to put,
copy those numbers in over here.
Common size.
Okay, so...
Equals...
That.
Come down.
Clear down.
And you can see for long-term debt,
look at that.
Very different companies.
Colgate-Palmolive is heavily leveraged.
Procter & Gamble is very typical.
20-25% is a very typical, normal,
low-leveraged company.
So Colgate, the smaller company,
has a lower net margin.
They are substantially more heavily,
highly leveraged than Palmolive.
And you can go through one after the other of the lines
and look at all of the different differences,
the different differences in policy.
For example, now...
I don't know why I'm having such a hard time remembering
what the hell company I'm doing here.
Procter & Gamble.
Now let me go over here.
Procter & Gamble.
Just one more.
Humor me.
Notice that their cash position.
That's actually kind of a relatively modest
cash position.
Let's take it over here to...
Colgate-Palmolive.
They are much...
They keep much less cash.
5% versus 7.5%.
That's a noticeable lower,
noticeably lower liquidity on the cash end of the company.
So Colgate-Palmolive, higher leverage,
lower net margin, lower liquidity.
One last one.
Just humor me.
Colgate-Palmolive's inventories
has a percent of total assets.
And now let's go over here.
5% versus 11.
12%.
So we've got a Colgate-Palmolive.
Has heavily invested in inventories
compared to its competitor.
That means that you could be fooled about the liquidity
if you look at just the current ratio.
Colgate-Palmolive has less cash,
but it has higher inventories,
so its total current assets could look very similar
to Procter & Gamble's.
And yet, true liquidity, which is just your cash,
is telling a different story.
Colgate-Palmolive is cash-poor.
And this is...
All this is evidence of a riskier company.
Even though the betas look the same,
I'm seeing two companies that are very different
in terms of their risk profiles.
Colgate-Palmolive keeps low liquidity.
It has a lower net margin.
It has a significantly higher amount
of its current assets in inventory
than its competitor.
And this is...
The ratios can tell you some of this,
but these common-sized financial statements
are a different view.
And as you can see, what I was doing there,
I'm seeing very, very different companies.
Even though according to Yee-Haw Finance...
These two companies don't look that much different.
There's Procter & Gamble.
Look at its profile, beta, price earnings,
dividend, all that good stuff.
And look at Colgate-Palmolive.
About the same beta.
Dearly Intrinsic Values looks the same.
Profitable.
Nice dividend.
The numbers that you're seeing on the front end,
don't tell the whole story.
That's what we do in financial analysis.
We go behind the curtain,
and we pull the company apart
in different ways, numerically,
and in other ways, too,
which I'll talk about later in the course.
But that's the end of this lecture,
and the lesson is,
never stop until you've tortured every number
until it confesses.
That's all I have for you today.
Thank you.