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principles of finance a la shmoop. investment measuring sticks. alright

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people well over a long period of time both company management and investing [men smile in a fancy room]

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management have grown, you know sophisticated. in the same way a NASCAR

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team inspects engine heat rpm tire pressure and so on we have similar

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mathematical tools to inspect whether a company or an investing thing is doing

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well or not. we'll come back to these tools in depth throughout the course but

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let's start with some analysis of company performance all right well to

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start we'll make up a silly little income statement for the silly little

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lemonade stand, lemonade stands R US right here

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revenues and revenues expenses all this stuff right there. got it ? okay so let's [income statement shown]

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just plow through this simple income statement and make a few observations

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that'll hopefully shine lights where things are dark in your brain. well how

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much did we sell a single drink for in 2020? a buck. we sold 20,000 units and

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took $20,000 in revenues in the door using advanced calculus that's a buck a

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drink. got it? why the $19,000 net revenue thing? what is net here? net of what? what

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is net revenues? well we had a number of people paying us using a credit card and

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Visa and MasterCard don't just have corporate jets for doing nothing

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somebody has to pay for them, right? so a good chunk of our business had us [plane taking off]

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collect a dollar pay a nickel to the credit card company and then we keep

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ninety-five cents of that drink for ourselves. but that doesn't account for a

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full thousand dollars taken off of gross revenues or total revenue, so what gives?

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well sadly a number of people took a sip spit out the fine formula lemonade and

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well they demanded their money back. we lost the nickel of that cup when they

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did that so a few hundred bucks were just lost cups and lost the drinkage. [equation pictured]

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so that's why we get a net revenue number. it's 19 grand that we collected

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in revenues, not 20 that we billed for. yeah that works very clever all right.

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and as a percentage of our profits well it was a big loss note that we spent 3

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grand on our product which we're defining us you know cups and liquid. we

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could have included rent because well we need a place to sell lemonade, but it's a

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just a street corner, really in front of our house, so we're not going to include

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it in the must-have things to sell our product category, and usually that's the

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delimiter in what you'd include in gross profits. so we had 19 K in net revenues

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and 16 K in gross profits. all right will our gross profit margin then what 16

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over 19. nice high margin and lemonade drinks. it would be rational if you [equation showing profits]

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wanted to keep $20,000 as the denominator you could in fact take as an

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expense the visa bills and the bad drink bills and stuff like that. someday maybe

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you'll have zero lemonade's to spit out or have a hundred percent of your drinks

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paid for in cash. so if you wanted to say that gross margin was really sixteen

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over twenty equals eighty percent well there'd be no rancor here in the

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hallways that'd be a vaunted du shmoop Wall Street corridors. [ man smiles in hallway]

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all right well key concept here is the difference between a profit dollar

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amount and the profit margin. got it? a profit dollar amount was sixteen

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thousand the profit margin was sixteen over twenty. PS margins are always a

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percentage. remember that. all right well rent labor and marketing you're all

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below the line expenses. all right well what line ?the gross profit line. that

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thing right there well that whole above and below the line things actually a big

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deal in Hollywood as a weird sidebar here a weird as that sounds from from

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shmoop and no extra charge here for telling you about this. profit

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participants ie the movie stars directors and producers are above the [gross profits line explained]

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line players, versus grips gaffers sound boon microphone holders truck drivers

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and people like that. why? well because above the line players compensation is

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usually variable. ie it hinges on how well or poorly the film does at the box

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office and beyond. you get profit participation when you're

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a player right but whatever that's a sidebar moving on. we have 8k in pre-tax

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profits here from our lemonade stand. this is also called operating profits.

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yeah well that's the profit we make from operating the business .why report a

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pre-tax number versus just ignoring it? and reporting the net after taxes. taxes

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vary from state to state from country to country and from year to [map of the U.S.]

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year and most companies want to be comparable on an apple to apples basis

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not to apples to kumquats. all right well that line is also important as financial

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managers like the future you think about trying to find ways to pay less in taxes.

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note that the operating margin of the company is 8 K over 19 K or 20 K

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depending on how you think about the real revenues realized, but keep the

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mapped easier let's look at the $20,000 total revenues will gross up our number

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and call the operating margin 40%. that's 8 over 20. all right. then we have taxes.

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all right. well we made up the 25% tax number but it's a good proxy for what [taxes defined]

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most corporations pay ,other than Apple at least you know who's based in Ireland

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so they avoid an enormous amount of taxes. good good on them. all right well

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the bottom line or net income of 6 K gives us a net profit margin or net

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margin of 6 divided by 20 or 30%. very high profit margins for a drink company.

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of course once the kids manage to score themselves a liquor license and start

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churning outside mama's house hard lemonade, well then the only thing higher

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than their margins will be their cleaning bill. [row of kegs in front of smiling child]

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