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0:00
(lively music)
0:05
- Okay, for those of you via the blog here, we are in Finance 370. This is a Business Finance course, it's a core course. We have a blog for those of you who don't know that it's coming live in the next month so, we're filming a couple of classes here and there and I don't you'll be shown, so feel free to talk like normal as they go forward. But what we are doing today is we are basically learning some financial analysis skills. And so, I have a packet of information for you.
0:31
This Alcatraz Corporation. So, we gotta balance sheet and an income statement if you watch it via the blog, I think we're gonna put it on the blog post as well. We have an Excel file you can download. What you're gonna see here is a balance sheet and an income statement are the first two tabs. And so we have two different years, just a basic balance sheet and income statement. Just as a quick review, you got your current assets and your noncurrent assets, your long term assets right there.
0:52
You got your current liabilities, and here's your long term debt, and your equity items right here. So, we got year over year, for two years. And then we have income statement as well for three years. So, this is something that you might see in a little more complex form whenever you look at publicly traded company and you're trying to decide do I want to invest in this company or not. And so, Apple is a hot stock now, you know, they are $670 per share, their coming out with iPhone five.
1:14
Should you invest in Apple? Well, before you do that, hopefully, you download their financials and give it a little review here and see whether the financials, the underlying financials are good more than just the rumors of the iPhone 5 coming out that are driving the stock price. So, what we're doing here today is we're learning some skills to look at balance sheet and income statement to see whether the company is strong or the company is not strong. So, on the PowerPoint slide,
1:34
let's just go through a couple things here. This should be viable on the web as well.
1:38
The first thing we're going to do is Horizontal Analysis. And, whenever we do Horizontal Analysis, we're just looking at change year over year. Okay, so you could do this with a number of things even outside the financial statements if you are trying to figure out what your percent raise was or what the percent tuition increase at Biola was year over year. You would be doing Horizontal Analysis. So, all you're doing here is basically taking the current year minus the prior year
1:59
and you are dividing by the prior year. Okay, so just a simple example if you made $1,000
2:07
in some summer job last year, and then this year, you made $1,200 if we're putting it in the formula right here. We'd have 1,200 as our current year, minus our 1,000 for the prior year divided by your 1,000, you're beginning your base is always your denominator right there and so, you would look at this and you would say plus 20%. Okay? So, we can do this on several items on the financial statement, so what I'd like us to do here is let's just flip over to our Alcatraz balance sheet.
2:37
Let's start with this right here. Based on 2010 as our base year, that we're gonna be using as our denominator in 2011 is the current year. Let's just, we don't necessarily have to go through item by item here, but take a couple of minutes here, and try to see what sticks out to you. Figure out the horizontal analysis, the change percentage for some key lines here where there significant changes are year over year.
3:05
I'll give you a couple of minutes to do that.
3:39
You don't need to calculate all 15 of them. 15 or so, just pick a couple big ones here and we'll just discuss those and make sure you can do the calculation as a skill set.
4:05
Get your calculator out here if you don't have one.
4:08
Now, you're going to use this as we go forward, so you're gonna need that all class. Ken, you start us out with anything that stands out to you?
4:17
Ken. - [Ken] I was trying to get my calculator out to be honest - Someone else have something that you want to pick out? One big change from 2010 to 2011, Carl, what do you got? - [Carl] Total assets. - Okay, so, we're looking here at total assets at this line right here. The difference between the two, how do you come up your percent change here? - [Carl] 6.37 - Okay, so you 6.37.
4:40
So, if we were putting this in a formula here we would say the current year 3588 minus 3373 divided by which
4:50
3373 the base year. Now, let's just put that together here on the slide, if I did
4:57
that sale minus that sale divided by 2010 sale we could put in a percent form, 6.37, there you go. Now, Carl looked at this and total assets is important but what you might want to do is, you know, total assets is a subtotal, so all that's doing right there is adding up cash, accounts receivable, inventory, and property planning equipment. We might have 2% here and 1%, not a big change but there could be what we call elephants pathing in the night. You could have one account going way up,
5:29
one account going way down, so what we really want to do is get a little bit deeper into the actual asset lines. Ken, did you have anything there? - [Ken] Yeah, I got one. The total current assets. - [James] Okay. - [Ken] 10.2. - Okay, so, now you're looking at this line here well, I think we're kind of doing the same thing. What is total current assets? Total Current Assets is the sum of cash, accounts receivable and inventory. So, I'm just going to copy that cell up
5:49
and you said, "10.28." Is that right? Okay, so, that is correct, so both of these are going up, so we're increasing the size of our business from 2010 to 2011, but these are still both subtotals, so let's put those here in yellow. What's the biggest driver of these increases?
6:08
You got four accounts to choose from basically anything going on there?
6:13
Property planning equipment, you wanna see what this changes? So, let's put that right there, I'm just copying this cell if I wanted to calculate the cell on our own basically for this we would have
6:23
2880 minus 2731 divided by 2731 and that number right there would be 5.46% Okay, so you got an increase there in PPE, let's just copy that cell up to the other ones.
6:43
Okay, so you got some bigger changes up there in current assets still. Okay, so if we did the year over year comparison between cash, AR and inventory cash is the biggest percent change, now that's only if this is in millions, you guys are heading up at the top, so always read your headings to make sure you know what dollar amount you are talking about so, that's only $14 million that we're increasing, but it's a big percent year over year. So, that's a big individual change here.
7:05
So, we can do the same things for items down below us. Let's just pick our other pieces here and copy these down.
7:12
Accounts payable, notes payable, our long term debt. common stock and retained earnings. Now, you notice I kinda skipped over our subtotals. The first thing we did was look at the subtotals here but you really want to look at more into the individual line item level here. So, are they increasing their debt or decreasing their debt here?
7:31
What? (mumbling) Yeah, so when you get a negative here that means they went down by about 14% here so they decreased their debt pretty substantially. What about their equity?
7:43
Their retained earnings and their common stock are both going up here, so you see they've got a capital structure shift between more debt in 2010 to more equity in 2011 here. Would you that is a good change or bad change? But mostly we'd probably say that's a good change. Okay, so you would analyze this and you can say well, they are paying down their debt, some of their assets are increasing here. They're increasing the size of their company,
8:03
but they are increasing it more through equity then debt so that's probably a good indicator of what's going on. Any questions on what we're doing right here?
8:11
Feel free, you're not going to be on camera.
8:14
Oh, wait, we could do same thing for the income statement. I mean, we might have a little bit more interesting information on income statement. So, what we need to do here with our income statement year over year. We're going to do a similar
8:27
We're going to do a similar format to what we did on the balance sheet. But we need to do current year minus prior year divided by the prior year. Well, we need to figure out what our base year is. What is our denominator going to be and for simplicity let's just go with 2010 here. You could do it year over year. You could start with 2009 and go to 2010. And you could do 2010 to 2011, but let's just take 2010 and go to 2011 as a comparison year.
8:52
So, this is our base year, this is our current year try to figure out what our component changes are our horizontal analysis year over year.
9:01
See, what stands out to you. I'll give you a minute or two to do that.
9:14
As we go through this just so you know on page three and four, I kind of got the built Horizontal Analysis results there. Let's just do it on our own here on page two.
9:25
So, ignore 2009 for now
9:29
we will hide that.
9:43
Why don't we see year over year on our income statement. Anything big going on? Greg? - [Greg] That would be another 25% increase in sales. - 25% increase in sales. Right here you did that sale 2500 minus that.
9:58
Let's put 'em in parenthesis here. Divided by the 2,000. And you got 25%. Very good. Most people would say if you are growing by 25% that's pretty big indicator there. year over year. Okay? Is that most significant thing going on? Starting with you. - [student1] 30% decrease in net income. - 30% decrease in net income. Okay, so if we took that and dropped it down negative 30% on that income, so someone would look at this as our bottom line or net income indicator
10:25
and that's pretty poor result there. We're losing significant money from what we did before. Ken. - [Ken] Interest expenses up 150% - Okay interest expenses is way up. So, we could ask the question if started here on that income and we dropped down 30%, why are we dropping down 30%? What is changing? Let's copy that up to interest expense there. Okay, big jump here, we have significantly more interest expense than we did before of 150% more than 2010.
10:50
We would need to look at this and we would say why is their interest expense going up? Either we took significantly more debt maybe our interest rate adjusted and we have more we have less sale rule terms from our bank. Something along those lines, but this would be a big indicator yeah, if this stayed the same, so you basically lost $180 million in it in additional interest in 2011. You know that would actually be more than 280 in 2010. So, that was a big reason why we were down
11:17
in terms of net income. Anything else that sticks out?
11:23
- [Student2] 60% depreciation. Okay, so, depreciation if I copy that up there depreciation is also up quite a bit. Okay, so two major expenses up here are quite a bit even cost as well. So, that was up 25%. So, if we looked at taxes, we'll put that up there as well. So, taxes are down why? Because it's a percent of taxable income here. So, we would expect if this goes down then our taxes go down as well, that makes sense But the line items of the business
11:50
could actually impact themselves would really be these four things right here. Let's put those in green here. Okay, so, we had a 25% increase in sales is Jose said first well, that's a good thing, but we pretty much lost all the benefit of that from it. More than 25% jump in our expense items right here. So, would you say income statement up, down? Yeah, it's a lot weaker than it was in 2010. Okay, all we did here was year over year and with this simple formula right here.
12:21
If you could remember this then you can do that skill for our financials. Okay, any questions on Horizontal Analysis there? - [Student2] (mumbling) - Yup, yup. Your base year is right here and then this is your curve. Okay.
12:37
Okay, we'll flip back over to the PowerPoint here. Let's talk about Vertical Analysis. Sometimes you see it called as Common Size Financial Statement. Okay, so, flip back over to our financials on page one and two. This is where we started our
12:56
our balance sheet and our income statement. And I'm going to go ahead and take all this off and we'll kind of start fresh.
13:10
Okay, so, let's say we have this size of a company here with if these are in millions that would be $3.5 billion in assets. So, we wanted to look at our structure compared to some other company that wasn't either near as big as 3.5 billion or significantly bigger than 3.5 billion Similar thing over on income statement we have 2.5 billion sales here, we have a 195 million net income. What if we wanted to compare our business to a smaller business? What if you are comparing Apple to Disney
13:38
or some other smaller business. Well, the way that you go about this is our Common Size Financial Statement. Okay, what we're gonna do here is we're going to take every line item on our financial statements whether it's our income statement or our balance sheet. We're gonna express that as a percent of some item on that balance sheet. Okay, so, whenever we do our income statement
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if we're going to do a common sized income statement
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we're gonna express every line item on that income statement as a percent of current year sales. We're gonna ask out of every sales dollar what was used for depreciation? What was used for interest expense those type of things When we're on our balance sheet
14:21
we're gonna take every item on the balance sheet and we're gonna put that in the numerator and we're gonna take total assets
14:29
as our denominator. Okay, and this gonna allow us to compare. Not only year over year, we're not gonna only be able to compare 2010 to 2011 to see whether we're getting stronger or weaker, but we're gonna be able to compare ourselves to other companies of different sizes. That's the idea here. So, let's flip back over to Alcatraz. Let's start with our balance sheet right here. So, we just said a second ago that our denominator is this total assets.
14:54
So, for 2011, we're gonna basically take and we're going to be re-expressing this not in numbers, dollars, but we're gonna be expressing it as a percent. Yeah, so, we're gonna ask the question what percent of cash, what percent of total assets is cash? what percent of total assets is account receivable? And then, we're gonna be able to compare that to what we did in 2002.
15:15
Whenever we go over to the income statement we're gonna be doing a similar thing. Let's bring back up
15:21
our 2009 year. So, we're gonna be taking all these numbers right here and we're going to be expressing them as percent of sales. This is our denominator for each year. Now, let's say we're doing 2010 right here and we want to figure out what our percent is through this line right here, we'll we're gonna take 1,200 and we're going to divide it by what? This, that or that? It's that 2,000 right there. It's gonna be current year sales. So, we could our numbers here and our denominator
15:46
is going to be 2,500. When we move over here, we move over here we're gonna be picking those numbers as our denominator. Okay, so, I'm gonna give you three or four minutes here let's start with our balance sheet. And Let's do some common sized numbers on our balance sheet you don't have to do all of them. But just as a check, let's figure out what that guy
16:09
accounts receivable, notes payable and retained earnings there, that is a percent of our overall business. And let's do it year over year. Okay, so, let's figure those three out at a minimum and we'll come back together here in just a minute and we'll look at that. Okay. Are you understanding the prompt? Do you understand what I am doing?
16:29
What percent of our total assets for this year is accounts receivable, and we're going to compare that to 2010. To see whether accounts receivable is now a bigger part our business or a smaller part of our business. Okay. We saw before that accounts receivable went up. When we did just a Horizontal Analysis when it went up around 10% or something like that. But how did that compare to the overall size of our business this is what our Common Size Financials are going to tell us.
16:53
So, take a minute and do numbers out. Okay, let's go through a couple of these together, let's start with accounts receivable. Anybody want to start us out? Ken, you want to help me with the accounts receivable how did you calculate your common sized percentage for that guy right there?
17:06
(mumbling) Okay, so, you took this individual line item for account receivable right there and you divided it by your total assets right there and you said that the accounts receivable for 2011 was 5.24% of total assets. Everybody with me on that? We would do a similar thing for 2010. The whole point is to compare and see whether it increased or decreased, how's the percent of the business? So, for 2010, we take that number right there and divide by what, Kim?
17:38
- [Kim] (mumbling.) - Right. The total assets for 2010 when you see that let's get a little more data here. So, they are pretty similar, but accounts receivable went up. As a part of our overall company pie, accounts receivable is now a little bit bigger pie. A little bit bigger slice. 4.9% compared 5.24% right there.
17:59
What about these right here? Bob, you want to take a stab at accounts payable? - [Bob] Can I use my phone as a calculator? - Sure.
18:11
Chris, what do you get for accounts payable here? - [Chris] Accounts payable (mumbling) - Yeah, that's the one for 2011. What did you come up? - [Chris] 9.6% 9.6, okay, so if we take that and divide by total assets
18:26
it was rounded a little bit, so let's say 9.59, 9.6%. Okay, is that more or less than it was from the prior year? 312 divided by the 3373.
18:38
And so that one's a little bit larger as well. So, these are major changes, these are fairly small percentages. But let's go down to retained earnings here. It looks like there's a pretty big jump entertain earnings so, if I took, 2041 so that's my retained earnings for 2011 divide by the total assets
18:55
57% compared to
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in 2010, 53%. Okay, so that's a fairly big jump. That's about three or 4% there that retained earnings are jumping up. - [Chad] (mumbling) - We're getting the component percentage but it is Vertical Analysis. So, why is called Vertical Analysis? When we did Horizontal, we were going across, right? So, we were comparing the relationship between these two. And we said, well it went up 10% or something like that. We're doing Vertical now, because we are on only in the current year.
19:28
So, we're looking at the relationship between 2011 and then we're looking at the relationship between 2010 and then we can compare them, but the idea is that we're expressing them vertically in percent of the whole there. - [Student3] (mumbling) - Yes, on the balance sheet it is. I mean, it's as if we flip over to,
19:45
this is page five I believe Here's our balance sheet common size And so, we've already calculated the sum of these. Remember, we just did our competent percentage for retained earnings there. I'll give you a second to get over to that page. Page five, correct? Okay. Okay, and what you could do if you wanted to is you could actually do a little calculation here and figure out the change across year to year. So, what's going on here? If I basically put all the numbers up here on this screen
20:12
if you had the time, you could have done this yourself. But what would you analyze this vertical analysis change between years to say that the company is doing well, doing poorly, what do you think?
20:27
Chris, am I going the right way or going the wrong way?
20:34
There's not a whole here, but the thing is that they are above 1%, what do you see? What's going on?
20:40
Why is that? - [Chris] (mumbling) Total assets is right here so this percentage right here is always going to be zero, right? Because these are always going to be 100%. Okay, so we're gonna have to look at the other items but what other items do you see? Here you go.
21:01
- [student 4] Not really sure. - Okay, someone else jump in here. What did you get? - [Student 5] (mumbling) - Okay, so one thing you could look at right here is the long term debt is down 3%. Okay, so out of $100 of assets, now we have $3 left of debt. So, that's fairly substantial there. Where is it moving to? We lost it here, we picked up, where?
21:22
Retained earnings right there, okay? So, we basically shifted some capital structure from debt to equity and we came up with the same analysis whatever we did horizontal, right? And we said they were moving some of our long term debt went down as a percent and our retained earnings and equity went up as a percent and we kinda came to the same conclusion that this is a different way to go about doing it. Okay, what could we do with this right here even outside of Alcatraz company.
21:43
You could take 2011 and you could compare it to some other company. And so, you could do similar analysis for a different company and compare percentages and see whether what the inventory percent of Target versus Walmart is and see how they change your view. Okay, let's go back to our income statement.
22:01
Let's do this for our income statement so, let's do it for all three years here. And this shouldn't be that bad remember that our denominator is always our current year sale.
22:13
So, what we want to do is, is we want to come up we want to trade these numbers, we want to trade the dollar numbers for percentages.
22:20
What's this line going to be?
22:22
When we do Vertical Analysis, our common sized financials that's always going to be a 100, right? Cause this divided by total sales, you know, it's always going to be 100%. And these are going to be smaller here. So, take a minute and figure out your common sized income statement.
22:38
Let's come back together here, and let's go through these. Let's start with 2011
22:43
Kyle, why don't you help me build some of the 2011 numbers here. So, if I was going to take 2011 right here
22:51
and I was going to figure out my component percentage for costing and sold what numbers would I do?
22:58
- [Kyle] For costing and sold, 1500 divided by your total sales which is 25. Okay, so 1,500 divided by 2,500 is 60%
23:11
Okay? Simple enough, if I was going over to 2010 how would I change that up? - [Kyle] 1200 over 2000 - Right, I'm just shifting everything to the right. Yeah, 1200 divided by the current year sales
23:25
right there it's 60% as well.
23:30
And for 2009, it would be 1000 divided by 1900.
23:37
Okay, so, it's going up right here would that be a good change or a bad change? A bad change cost you were told was an expense, right? So, that' increasing. So, let's look at net income here. Anybody see that something significant is going on with net income. Yeah, so, go ahead. - [student 5] Profit margin is (mumbling) - Profit margin is going way down. Okay, and so, that is calculated in the same way this is gonna be your numerator, your current year of sale is gonna be your denominator.
24:03
So, 195 million divided by the 2.5 billion so 7.8 let's compare that to your arrear. I'm just going to copy my formula over.
24:13
Okay, so big drop. So, over here we were making $20 of profit for every dollar of sales. That is going way down 2010 to 2011. We're losing money along the way, money is being eaten up by these other expenses. Somewhere in the middle. So, the big question is where is it out?
24:32
So let's take depreciation and let's calculate that. 400 divided by the sales I'm gonna copy that cell over, I was gonna say you can see the depreciation are going up quite a bit From 10.5, the sense of every dollar and 16 cents
24:47
You see that I'm not really looking a whole lot at our subtotal. I'm doing anything with E, but that's the subtotal which is sales minuses cost against sold minuses depreciation. Now, really do anything with taxable income. Let's look at interest expense.
25:00
300 divided by 2.5, so is 0.12 cents in 2011 but it was a lot lower, it was even less than half over in 2009. So, that's why this is dropping so much. For those two main reasons, you've depreciation and your interest experience started ramping up. There is a page, I think six. Where I have all numbers written out for you here.
25:24
So, this would be the full Vertical Analysis for Alcatraz income statement. And so, you could compare 2011, 2010, 2009 and see whether the company is getting stronger or weaker. This a required disclosure, so if you are, or looking a public company And decide whether to invest or not you don't actually have to do all this out in public company's documents this hasting. So, this many back five years ago or so and in their management discussion in an analysis
25:52
in their 10k, they've basically proved this for you: For the last three years, 2008, 2009, 2010. Half the percent of their total revenue is here so that's 100%. And these are the different percentages here. You can see that their profit margin was very big in 2008. So, they are making less than one cent out of every dollar in profit. One cent out of every sales than even profit is even less in 2010, but one of the biggest shifts that are going on let's look at this. Ask GNA is a big one,
26:20
selling general administrative expenses so store employee personnel, headquarters personnel those type of things. You can see that, there's only 34 cents out of every dollar but there's over 35 in 2010. So, that's a pretty big jump, they are losing, you know that dollar and half of every 100 sales dollars in profit. because this is increasing year after year. Okay, so you can actually go look this up for a public company and you understand how to calculate the numbers.
26:48
Okay, any questions on Vertical Analysis. What are we trying to do?
26:52
What you could do here as well in addition to seeing our Alcatraz company right here you're over here you can compare Alcatraz to another company. So, for our cost to consult for if you're going to compare Walmart and Target you can see, what their percentage for cost against sold for other products is and you can see which one is doing well. Better when there's a report, but it's there. Okay. Any questions here? Yes Tyler. - [Tyler] How accurate is that at predicting or showing [mumbling]
27:21
- All right, so that's a good question, so this is the historical information so we looked back over on the Hastings over here and so this fiscal year 2010 which ended January 31, 2011. So, you know that's a while before. So, you can see the trends though. So let's not think significantly change. You they are not really picking up, going forward so it's not necessarily a crystal ball, but I mean, it's a good indicator of possibilities, right Chris? - [Chris] Just to continue on
27:46
that is are most companies this consistent or are numbers (mumbling) (mumbling) - Are you talking about like pretty color Hastings right? (mumbling) - Would you consider this consistent or inconsistent? (mumbling) Either consistently going up or consistently going down. Because there is some (mumbling)
28:11
- Well, typically they shift and the left management changes strategy. They shift in the same direction, year after year. Now, they're typically not going to be a major shift like though hasting's for example, you should expect their SGA percentage to be, somewhere between 33% and 36% year after year after year. If they jumped up for whatever reason in 2011 to 40% that would just be a huge change. So, you typically don't major shifts like this, but if a company dramatically changes
28:36
so let's say there was a merger or Apple comes out with a new product that just like totally revolutionizes everything then you might see something significant go up. So, let's Apple figured out a way to make iPhones instead of sending over to china and all these suppliers combining all the parts where the cost of an iPhone is $200. Maybe, I figure out how to make it for 20 bucks. Well, what would change here? Well, their sale rates are gonna be high
28:57
but their cost of revenue is gonna be significantly lower. If something dramatically shifted in the business and you can see a major change, but for the most part not a whole lot.
29:05
Okay, so you understand what we were doing? Horizontal was across and you're over here and Vertical was within the same mirror like that. Okay? Okay, so, let's talk about Ratio Analysis what we're doing with Ratio Analysis they are basic ratios that are set up in finance to help your figure out some key indicators of a business. Okay, now this isn't totally objective, so I got up here Apple to Apple was just as much as art as it science. So, you know, you can get a good indicator with ratios
29:30
that's not always gonna be necessarily red or green indicator. What you are trying to do here is your figuring out a ratio where you are comparing it to previous performance or to bench mark in the industry. So, we're gonna through several different ratios we got about 15 that we're going to discuss and you're going to say the current ratio for example, we'll come back it here in just a minute. Do they have a good current ratio and what does that say to their liquidity compared to the industry.
29:52
Okay?
29:55
So, whenever you do rate show year over year the reason that I say you got Apple to Apple's up here. You want to make sure that you are comparing the same thing. If you are calculating current ratio in one method in the first year, and then a different method in the second year, you really can't make a comparison. Or if you are comparing two different companies and their calculation of some percentages does differ the way they go about calculating that number
30:14
well that's not really an apple to apple comparison. So, a lot of times in business you say we'll there's this Apple to Apple comparison that's what that means. Or we can compare any similar things. So, what we're going to do is we're gonna go through five different types ratios here in just a minute. We have Liquidity Ratios. Liquidity just as a refresher what does that mean? Hailey, what does liquidity mean? - [Hailey] Liquidity? - Liquidity.
30:36
Oh, well, we can pay what?
30:39
Our debts. What am I thinking? How well we can pay our liabilities off? Asset Management Ratios. How well are we using the assets that are entrusted to us? How well are we turning our inventory over? How well are collecting our accounts receivable? We're gonna look at some of those. Debt Management Ratios, so well are we controlling our debt?
30:57
Profitability Ratios. Do you remember one of our other business goals profitability in addition to liquidity. So, how profitable are we? So, we're going to look at a couple of different ways to assess that. And then Market Value Ratios. How is our business in accordance with how it's valued out of the market? Let's come back together, and we're just gonna go one through 15 and you guys are spread out all over the place so I'm not sure where you are.
31:17
But the current ratio I think it was Cant and Chris is that right? You guys had current ratio, tell us how you've calculated I got the little ratio tab right next to balance sheet and income statement so, we'll flip back and forth. How'd you know about calculating current ratio?
31:31
- [student 5] To get your current ratio
31:35
so we'll do current assets divided by current liabilities - Which of here we got 708.
31:43
divided by the 540, right? - [student 5] Yeah. - Okay. So, that gave you - [student 5] 1.31 Okay, that's not a percent, that should be number there all right, 1.31. What does that tell you if you're expressing that in a sentence?
31:59
- [Student 6] That would tell us that we have more current assets than current liabilities at the moment. Okay, because it's greater than one. Okay. (mumbling)
32:15
- 1.5 to 3 for your current ratio that seems pretty good, pretty reasonable current ratio. So, if it was three, if your current ratio was three basically you would have $3 of current assets for every one dollar of current liability. So you have pretty flexible room to pay off your liabilities, we talked about last time. We talked about liquidity versus return. And we said current ratio of three to one versus current ratio of 10 to one, which one was better? - [Student 6] Three to one.
32:43
- Three to one was better, so it was a little counter intuitive while ten to one basically means you�re not using some of your assets properly. You can reinvest some of those current assets. If we flipped back over to our balance sheet what are our current assets? We have a cash, a counter, a table we're not really getting any return on these guys right here Well, if our ratio got way above three, we'd probably want to some of these assets bring them out to there to our non-current assets
33:05
and get a higher return. That's the idea there. Any other thoughts on current ratio? You understand that one? Make sure, you are getting your current assets and liability and not your total assets. Your total liability there. Okay, now this gives us an assessment of our own liquidity. How well can we pay our debts if it was below one then we're kind of in trouble. Too many liabilities there.
33:26
We're only up a 11%, so if you did you could compare your arrear which would be good. If you are doing your analysis on your case, so let's just real quickly, we'll take our 2010 divided by that number and we got 4.18. So, you can see our current ratio has improved just a little bit Pretty similar, but it went up a little bit. Any question on that guy?
33:49
Okay, quick ratio, who's got that one?
33:54
- [student 7] (mumbling)
34:01
- So you have the 3588. - [Student 7] Yeah
34:05
And you subtracted inventory? (mumbling) - Oh, sorry, you're current assets. Current assets you're right (mumbling) So 708 - [Student 7] minus 422.
34:24
- Plus the 422, - (mumbling) - So, I have my current liabilities and you got - [Student 7] I got.53.
34:34
.53 okay. (mumbling)
34:43
- So, for 2010 you'd take the 642 minus the 393. - [Student 7] Divided by the 543. - Divided by the 543. Yeah, got to formulate it somewhere.
34:54
Let's try it again real quick.
35:00
Put that in brackets. Okay so 642-393
35:12
divided by hang on, I know what you are doing, okay. We'll just put the numbers in here 'cause the link going back and forth between the tabs. So, tell me again the number. - [Student 7] Okay, so 642 minus 393 divided by 543. - Divided by 543 And you got - [Student 7] -.46 - .46. Okay. So, are improving or are we getting worse here. (mumbling) - We're getting better, okay, so, you would hope that that would be What kind of goal are we shooting here?
35:40
(mumbling) - So, what do we expect it to be above or below current ratio.
35:51
It's going to be below because inventory is a positive number here. So, this is always going to lower than that. Assuming you have any inventory. Okay, but we don't necessarily need number that's above one. So, anywhere between.5 and one is probably good because inventory a lot of times is a big component of a lot of businesses. Operation there. So, this gives you a little bit quick into this quick because what assets can we sell quick in order to pay our debts, right?
36:14
Inventory sometimes take a little bit longer and so sometimes this ratio of liquidity is used as well. Okay, we good now? Next, are you all on termed ratio or total net ratio Okay, what do we got here? (mumbling) (mumbling) (mumbling)
36:47
What so I was long termed at?
36:51
457.
36:54
(mumbling) - 3588. Okay? Is that what you got? Say.28 or 28%. How would you express that in a sentence? What does that tell you? (mumbling)
37:17
- Yeah, very well said. Okay, how are we using our debt to finance our business? For every $100 of assets $20 came from liabilities. So, what I'm gonna tell you about equity.
37:33
72% would be from equity. Right? So, you can also make inference in terms of your equity from this number right here. Did you compare it to 2010? What number did you get there? 32? Okay, so, remember we saw this before that they had paid down debt from 2010 to 2011. And so, that you would expect their total ratio of total debt ratio to go down.
37:59
So, that's good. We're basically making an inference here in terms of capital structure. How much of our financing goes from debt? We can do a similar thing here with debt to equity ratio whose got that one? Carl, Carl? Okay. (mumbling) Why don't we go through this I'm gonna flip over to our answer pages. So, the last three pages of your packet here and you guys can kind of walk me through this as we discuss here so just for the simply of having us all in front of us here
38:27
we're third from the last page here on total equity ratio. (mumbling)
38:49
What was your number? - 3089 30.5% It tells you, tell me again what I told you. - (mumbling) - Get your finance more through equity. So, if this was 100%, what would you say? - [Carl] You're financed equally - You're financed equally, so anything below 100 would be more equity and anything above 100 would be more liability. Okay, so you can say a similar thing. Remember above we said that up here 27.8% was financed through debt and the opposite was 72.2. So, what if we did equals 27.8 divided by
39:29
the reciprocal of that which was the 72.2. There's the 38.5 which is outnumbered right there. Okay, so it's an it's a similar ratio to get you to say in conclusion that we're financed more through debt than we work. I'm sorry, we're financed more equity than we work through debt. Are you with me on that? Okay. Time's intertwined whose got that? Chad. (mumbling)
40:06
Okay, so you're using earnings before interest, tax, depreciation and amortization, we talked about last time Why would you use this instead of net income?
40:15
This excludes these four things, as looking at Ernie�s before that. Do you recall the reason why we said that?
40:24
If we're just looking at the operation do we think what manager ever has control of? We don't have a lot of control of tax, depreciation and amortization all those are deducted to get to net income we might go a little bit higher look at EBADAC in terms of what our operations bring in. Okay, and so keep going with your explanation. - [Student 8] (mumbling) - So, you took EBID and you added depreciation back and so that's your numerator divided by your interest expenses
40:50
and you have 3.3 telling you what? - [Student 8] (mumbling)
41:04
- It's not necessarily, not necessarily. - [Student 8] (mumbling) - That's more close to what it's saying. How easily can we pay off our interest? Is our interest such a burden that we're not ever gonna be able to pay it back. So, basically this tell us that whatever our interest expense was we are in 3.3 times more in order to pay it back and so you would hope that this would be a fairly high number, right? If it was below one, your kind of in trouble
41:28
because your interest expense is greater than your earning to actually pay it off. You're never going to get off from under that debt burden. (mumbling) Okay, yeah, because interest expense was going up right, year after year. Right? So, if you wanted to compare year after year then that number was significantly higher than 2010-2011. Okay, good comment there. All right, inventory stuff whose got inventory turnover?
41:53
Taylor?
41:56
Okay. - [Taylor] (Mumbling)
42:10
Okay, so here's rate shown cost and sold divided by
42:16
average inventory. All right, cost and sold is number on income statement. Inventory is a number on the balance sheet. Why are we using average inventory?
42:26
Anybody got an idea there, why not just take cost and sold divide it inventory?
42:34
Going once, going twice. Any ideas there? What if we did this? So, here is our income statement for the year January 1st to 12-31. Cost and sold is on the income statement we're capturing cost and sold across time right? So, we're seeing what is the cost of our product all the way through here? And if we only used inventory rather than just average inventory, well, we're gonna be picking the final number right here on 12-31. What if our inventory levels were like this?
43:00
What if we were going along and then we had a big sale right at Christmas and then our inventory dropped to here. If we use that number for our inventory and do our calculation well we got a big suing of our result here, okay? So, anytime you compare something on the income statement in a ratio. There's something on the balance sheet since the balance sheet is a snap shot you want the average of the balance sheet number right there. Okay, so, to practice what you're going to be doing
43:23
is your going to be calculating inventory number on a daily basis, your companies are going to be seeing what their inventory is daily adding it all up and dividing by 365. For our purposes we will just take the beginning and ending add 'em together and divide by two to get our Average, which is what Taylor did over there. Okay, so you got on the income statement 1,500 there that was your numerator, and you averaged the two inventories right there and you came up with what was our number?
43:52
3.68 right? Yes. - [James] Good or bad?
44:03
Genna? - [Genna] What? 3.68 is that good or bad? - [Genna] It's amazing. It's amazing. Inventory, what does that tell you if you're putting that in sentence? (mumbling)
44:19
3.68 times, almost four let's just round up to four and say the three year we sell our inventory four different times. You go to the supermarket, and you want to buy some milk that milk gets turned over four times a year. (mumbling) - With not amazing anymore. Okay, well he just said it was amazing, well, it kind of depends. (mumbling) - We're selling very nice luxury airplane. Okay, so, he's not sure any more, if it was an airplane okay, so let's say, airplanes, homes, cars,
44:50
something like this. This would be a pretty good turn over, right? You're selling it four times a year, you'd want a significantly high inventory for bread, or milk or something like that at the grocessary store. So, it's going to pen on the type of inventory you have. A day sales in inventory, who had that? Go ahead, guys. (mumbling)
45:10
So, you had built off of this up here, right? So, you kind of had to calculate that before so you took the 365 divided by that (mumbling)
45:24
So, it's slowing down, right?
45:27
We're basically your saying how long did it take you to sell your inventory? Okay, so if that's milk, you don't want milk sitting on your shelf 99 days you might be super. You want to be too unhappy if it were airplanes or something like that. So, it depends just like inventory turn over they kind of tell you the same thing. Let's go quickly through AR turnover. Who had that? Go ahead, guys. (mumbling)
45:54
- Total sales for the year, so 2011 sales (mumbling)
46:01
- Average accounts receivable, okay. (mumbling)
46:11
- So, basically we sold something and it sat in our receivable for a while and then we collected 14.16 times throughout the year. It's kind of a measure how efficiently we're collecting our receivables. Is that a good number, is that a bad number?
46:25
Maybe, but not quite as much as before right? Receivables aren't going to go bad for milk nor quicker than they are for airplanes or something like that. The product goes bad, so the inventory turnover is gonna be variable, but right here, you know, If you're above 10 or 12 if you're collecting within a month's period of time that's probably a good ratio there. Who had average collection period? (mumbling) Okay.
46:53
So, you're taking this, you had to calculate this first - [Student 9] Yeah, we're taking (mumbling)
47:04
- Okay. (mumbling)
47:15
So, basically on one you sell something on AR
47:20
and then 1/26 you collect. So, that wouldn't be too bad. Collecting within a months period of time. So, probably anything below 60 days is probably not too bad. You wouldn't want it to be too long 'cause you are without your money there, and you're having to finance your operations from other sources there Okay, moving forward our next one profit margin who's got that? Go. - [Student 10] For profit margin (mumbling)
47:50
- Okay. You saw this somewhere else, if we went over to our common sized income statement and there's 7.8% that is our profit margin right there. So that income divided by our sales right there and if you are expressing that in sentence what would you say? (mumbling)
48:13
- Okay, how much do we keep on the bottom line? Out of every $100, how many dollars do we keep? Well said. So, you typically want that to be a pretty high number and that's gonna change based on the industry so I showed you retail, Hastings has like 1% profit margin restaurants are pretty low as well. Technology is typically pretty high. So, that could be ratio that would depend on the industry that you're in. On the way, return on asset, Brenda. - [Brenda] (mumbling)
48:42
- okay.
49:04
- Oh, well, you invested. Right. So, this kind of the parabola of the good steward, right? So, the more that you have in total assets the more you should be expecting to be making that income. You would expect net income for a big company maybe higher than those of a small company this basically averages it out. So, that you can compare a large enough small company here. So, again this is the number for a particular year your net income is for a particular year
49:25
we need to take an average of our number of our assets we don't want just final number, so we gotta compare Apples to apples. Over time versus a number that's kind of overtime as an average and you get 5.6. So, out of every $100 of assets that are invested we are returning $5.6. Okay, good. How far are we? Who's got that one? Go, ahead, Kelly. - [Kelly] So, you take the net (mumbling) - Okay.
49:58
Okay. Okay, so we saw on our income statement that that was going down, that income was down year over year over year, so this is actually going down as well. So, for every $100 of equity this is our owner investment they made $8 of net income. Right? So, good, we're just expressing that as a percent though. So, that would be another thing that you would compare your arrear. Okay, so a couple things here as we wrap up earnings per share we're looking at actual market value measures
50:25
and these are things that are used all the time in investing you hear this on the news. This EPS is probably the first thing that is published on a company�s press release so you know seeing their earnings. So, who had EPS? You guy, who's up? - [Student 11] So, the net income was 195 (mumbling)
50:45
- Okay.
50:48
Okay, so you said 195, but that 195 over on the income statement was expressed in what? Millions, okay so Sometimes somebody is going to do this 195, and they are just going to put it in as 195 and then on the balance sheet it said that there are 33 million shares and so they would do something like this, so 195 divided by 33 million and you're going to get something ridiculously small and said they made no money. But this is really 195 million, so Apples to Apples, right?
51:15
You need 000,000 or take all the zeros out and do it like that, okay? All right, and so on our answers again, you came up with 591, right? and if you express that in a sentence what is that tell us. - [Student 12] (mumbling) - Okay. So, each share what was the profit allocated to that particular share $5.91. PE ratio we're almost done, hang on for just a second. PE ratio go ahead. - [Student 13] (mumbling) - Okay, so we had to calculate this first? (mumbling)
51:55
- Okay. (mumbling)
52:03
Okay good. Okay, so this is another thing if you go out to yahoo finance this is going to published and this is an act of thing that you track and finance. So, this is from the previous 12 months. This changes every day, right? So, your price goes up and down, so your PE ratio actually changes every day, every couple of hours as well. After we go through all these, we gotta figure out whether they are good or bad like we were talking about inventory turnover
52:25
so 15 right there, that's probably about average. So, I gotta couple notes that you can read through 15-20 is just about average. What do you think Apple is right now?
52:33
What do you think Google is right now? Some of these tech stocks their prices are way up, their earnings aren't quite up to up to that level and so they have a very high PE ratio so you're paying a lot for what they're actually earning. Why would you do that? One of two reasons go ahead.
52:49
That's my thinking so you could expect that this earning from the next year or in the coming year is going to catch up. Okay, so we have high expectations for the future or maybe the prices are just way too high. Maybe, the market is over inflated and if not justified. So, you kind of got two different options there is one positive and one negative. Market ratio - [Student 13] So, the market value is given at $88 per share to calculate both (mumbling) Equity divided by (mumbling) (mumbling)
53:23
- Okay. - [Student 13] So we got room for which means the market value seems to go for 12% - Okay. (mumbling) - Okay, just real quick as we wrap up this is your market price that we can figure out before so that price changes every day you could just look up on particulars and see what the price is this comes from your balance sheet. So, if you had trouble with that one go back to your balance sheet and you saw that here's our total equity right here if you're figuring out the book value
53:54
you just divide this by the number of shares. Okay, and so, there's typically going to be a difference why is there a difference because this book value for share is a historical number so we're basically saying as of that previously period end so December 31, 2011 what was our book value this is our current market price and so there is going to be some relationship there more often than not it's probably going to be a high arch number than one.
54:20
The market price is in expectations for the future this is historical, so I want to look at this and say that price is yet too high or anything like that. That would give me an indication whether the market price is too much or too small. Okay, okay, we wrapped we got all the way through you'll get a chance to do this on the case if you have questions shoot me an email and we'll go from there. - [Voiceover] Biola University offers a variety of biblically cantered degree programs
54:45
ranging from business to ministry to the arts and sciences. Visit Biola.edu to find out how Biola can make a difference in your life.
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