James Webb: How to Read a Financial Statement [Crowell School of Business]

(lively music) – 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. 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. 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. 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, let’s just go through
a couple things here. This should be viable on the web as well. 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 and you are dividing by the prior year. Okay, so just a simple
example if you made $1,000 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. 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. I’ll give you a couple
of minutes to do that. 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. Get your calculator out
here if you don’t have one. 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? 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. So, if we were putting
this in a formula here we would say the current year 3588 minus 3373 divided by which 3373 the base year. Now, let’s just put that together here on the slide, if I did 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, 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 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? You got four accounts
to choose from basically anything going on there? 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 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. 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. So, we can do the same things
for items down below us. Let’s just pick our other pieces here and copy these down. 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? 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? 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, 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? Feel free, you’re not
going to be on camera. 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 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. 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. See, what stands out to you. I’ll give you a minute or two to do that. 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. So, ignore 2009 for now we will hide that. 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. 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 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. 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 in terms of net income. Anything else that sticks out? – [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 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. 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. 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 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. 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 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 if we’re going to do a
common sized income statement 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 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 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. 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. Whenever we go over to
the income statement we’re gonna be doing a similar thing. Let’s bring back up 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 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 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? 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. 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? (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? – [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. 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. 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 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. 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 57% compared to 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. 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, 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 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? Chris, am I going the right
way or going the wrong way? There’s not a whole here, but the thing is that they are above 1%, what do you see? What’s going on? 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. – [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? 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. 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. 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. 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. What’s this line going to be? 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. Let’s come back together here,
and let’s go through these. Let’s start with 2011 Kyle, why don’t you help me build some of the 2011 numbers here. So, if I was going to take 2011 right here and I was going to figure
out my component percentage for costing and sold
what numbers would I do? – [Kyle] For costing and sold, 1500 divided by your
total sales which is 25. Okay, so 1,500 divided by 2,500 is 60% 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 right there it’s 60% as well. And for 2009, it would
be 1000 divided by 1900. 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. 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. 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? 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 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. 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. 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 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, 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. Okay, any questions on Vertical Analysis. What are we trying to do? 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] – 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 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) – 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 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 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. 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 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. Okay? 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 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. Oh, well, we can pay what? 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? 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. 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? – [student 5] To get your current ratio so we’ll do current assets
divided by current liabilities – Which of here we got 708. 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? – [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) – 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. – 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 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. 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? Okay, quick ratio, who’s got that one? – [student 7] (mumbling) – So you have the 3588.
– [Student 7] Yeah And you subtracted inventory? (mumbling) – Oh, sorry, you’re current assets. Current assets you’re right (mumbling) So, 708 – [Student 7] minus 422. – Plus the 422, – (mumbling) – So, I have my current
liabilities and you got – [Student 7] I got.53. .53, okay. (mumbling) – 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. Let’s try it again real quick. Put that in brackets. Okay, so, 642-393 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? (mumbling) – So, what do we expect it to be above or below current ratio. 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? 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) What so I was long termed at? 457. (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) – 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. 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. 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 we’re third from the last page
here on total equity ratio. (mumbling) 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 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) 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? This excludes these four things, as looking at Ernie�s before that. Do you recall the reason why we said that? 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 and you have 3.3 telling you what? – [Student 8] (mumbling) – 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 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? Taylor? Okay. – [Taylor] (Mumbling) Okay, so here’s rate shown
cost and sold divided by 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? Anybody got an idea there, why not just take cost and
sold divide it inventory? 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? 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 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? 3.68, right? Yes.
– [James] Good or bad? 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) 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, 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) 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) So, it’s slowing down, right? 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) – Total sales for the year, so 2011 sales (mumbling) – Average accounts receivable, okay. (mumbling) – 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? 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. So, you’re taking this, you
had to calculate this first – [Student 9] Yeah,
we’re taking (mumbling) – Okay. (mumbling) So, basically on one
you sell something on AR 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) – 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) – 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) – okay. – 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 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. 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 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) – Okay. 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? 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) – Okay. (mumbling) 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 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? 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. 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) – 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 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. 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 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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100 thoughts on “James Webb: How to Read a Financial Statement [Crowell School of Business]

  1. If this is private school eductaion then damn…. Public schools need to catch up. There are tons of people in business school that can't analyze financial statements including myself. I'm going to get this before moving forward. It's a valuable skill to becoeme financially literate.

  2. Love this video! awesome professor. he just ran out of time before he covered the last topic which was Market Capitalization! But loved it overall.

  3. great topic .very useful in real word accounting firm identify a strong  financial or a week financial in order to invest money . thank you.

  4. The Alcatraz books are cooked, I took a plane and visited this company. Its just an abandoned building on an island with a hobo and rat attending the lobby. I think all the stock holders got taken to the woodshed here.

  5. Nice video and well explained! For someone with no background in finances I understood it well ;p Is the excel file available to the public? Please if so, send me the link. Thanks in advance.

  6. Thank you for this good presentation. Could you specify please the sector of activity of Alcatraz corporation ? it would be useful to know the sector to make easy comparaisons 's ratios. best greetings from Tunisia,

  7. I wasn't able to see any of numbers on screen. Can you make it bigger or clearer please. I don't have to see the teacher speaking on side.

  8. awesome, thanks! the video in which the teacher solves the problem along with its viewers is way way better than pure lecture. most beneficial of investing videos till now.

  9. What a great video and also giving the excel formating with the info on it and how to do it, makes it even better! Thank you.

  10. I have listened to tutorial after tutorial over two days. This by far was the best explanation I have listened to on financial analysis. Thank you so much.

  11. I really appreciate you posting this video. My Professors never even taught me this and yet they expect me to do a capstone project that evolves having some of these components.

  12. Super helpful for those of us who studied other fields, like science and now need some education in finance to further our careers – excellent instructor!

  13. Amazing explanation and professor! he engaged his student through the whole lecture! I watched the video at speed of 1.5 and still was able to follow everything! Not to mention taking lots of notes!
    Thanks prof. James!

  14. If you need help in your homework, assignment and term papers, contact me on [email protected] I will help you in your financial analysis, accounting, calculus, SPSS, MATLAB and general mathematics. I will not only help you finish your assignments in time but also ensure you comprehend every bit of the assignment and the topic. I guarantee you higher grades. Contacts [email protected]

  15. Right off the bat the Military in me says "Get your hands out of your pockets" If you are that lonely you may not be who you are trying to present yourself as. (35 years ago I had that One Way discussion with the SGTMGR and I have never forgotten it) ;^)

  16. This is glorious, I have been researching "freedom finance inc" for a while now, and I think this has helped. You ever tried – Ferapt Freedom Fanboy – (should be on google have a look ) ? Ive heard some decent things about it and my mate got excellent success with it.

  17. People with this type of quick delivery should NEVER be allowed to teach. If I sat James down in a kinesiology class that he had absolutely zero knowledge of and gave him this type of high speed delivery, he would learn NOTHING. Sorry James. Fail.

  18. Thank you for the lecture, video and the Excel file! I learn a lot about financial statement and ways to analyze them in under one hour.

  19. My first 1-hour youtube clip ever watched without skipping through. Well done James!, Brilliant delivery!!

  20. I am a fresh civil engineer with no background in finance, and I have to interview tomorrow for a position as a business analyst. i must say this is very useful. Thank you so much.

  21. James, thank you for taking a complex subject and making understandable. I really appreciate how you made the math easy to understand, you made it clear which metrics I'm looking for on a company's balance and income sheets, but most importantly, you gave me a nice introductory understanding in how to interpret the data. That's everything I was looking for. Thanks for taking the time and God bless you.

  22. Hi James thanks for the vid, I'm just wondering if you have any mathematical advice for trading forex (major currencies only). Thank you

  23. Mr. James Webb, I am elated to have found you at such a key time in my career. Thank You for thoroughly explaining the subject.

  24. I like how he teach their students by asking them questions of each calculation and make sure they know the meaning of the ratio. Thank you!

  25. James, thank you for landing me my next role as a financial analyst. No one else can do what you do. You rock!!!

  26. MR. Webb you are a fantastic instructor!!!! Thank you so much for making this public….. Thank You, Thank you…..

  27. well prof. James , i would like to ask you i understand the horizontal but in the vertical why did you made sale on the income statement and total asset from the balance sheet the denominator ? i hope i get back any further information. also is there any video record that i can watch based on these topics

  28. 18:00 i really thought the base for liabilities and stockholder's equity items is total liabilities and stockholders' equity. (Managerial Accounting sixth edition)

  29. Watch a 30 mins video in 3 mins. The BEST extension in google chrome store. https://chrome.google.com/webstore/detail/threelly-ai-for-youtube/dfohlnjmjiipcppekkbhbabjbnikkibo

  30. Literally

  31. For those who enjoyed the video and would like to take an online class with me, I teach Introduction to Financial Accounting and Introduction to Managerial Accounting three times a year through UC Berkeley Extension. Information can be found here: https://haas.berkeley.edu/accounting/accounting-berkeley/uc-extension/

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