All right, here I have a income statement for the computer company Dell. This is before they went private, this is a annual income statement from January 2007, 2008, 2009, 2010. So remember, we've just gone over the two natures of percentages. One was a percentage, this a percentage of the whole, and the second was the percentage change. So we're looking at an investment or return or something over two periods, let's look at the first one. Now this is an exercise that you're likely to do in a cost accounting class. Maybe a finance class or an operation's class, try to understand, what is the trend in this company's financials? So as a percentage, we're going to say is, hey, I wonder what percentage are cost of goods sold, COGS, are as a ratio of our total revenue? Well, I wonder what our operating income is or our EBITDA, or our net income, these are percentages. So here is our spreadsheet, what I'm going to do is I'm going to say, look, let's suppose that we want to take total operating revenue here, okay? I want to take total operating revenue as a percentage of total operating revenue. Boom, I get 100%, so you're saying, so operating revenue is 100% of operating revenue, that's very interesting, but that's not helpful. It gives you a baseline, you understand what this number means. Let's look at here, COGS, cost of goods sold, okay? So for cost of goods sold here, we say our cost of goods sold instead of the cost of our inputs for a manufacturing firm, let's say. Delta manufactures computers, they're going to have costs associated with manufacturing computers. So I say, what are my COGS, costs of goods sold, with a ratio of my operating revenue, my sales? Boom, I get this number, 80.88%. It's very interesting. So like what does this mean? It means is that, if I sell a $100 worth of stuff, $80.88 is paying for the materials that I used to just manufacture that stuff. So what does that mean? It means you don't have a whole lot of money left. Yeah, a little bit less than 20 cents. Here, I can calculate that right here in this formula, this is called my gross margin. And so my calculation on my gross margin is, what is my gross as a ratio of my sales? And now you'll notice that look, this number 19.12 plus this 80.88 is equal to 100% and it should. So, this is my cost of goods sold, it's 80.88% of my total revenue. Here's my margin, 19.12% of my total sales. So, before I can start paying for any kind of operations, I'm only bringing 19 cents of the dollar, right, down. So this is an analysis that you're likely to do throughout your MBA career. And understanding where this percentage is coming from is very important. Very, very straightforward, but it's very critical that you understand how to do this simple calculation, okay? What we can do is we can take this same technique and bring it all the way down across our income statement here, so this is a percentage of my total revenue right there. So it's like my operating income after I have all of these expenses, okay? And I can do this for each one of these things. So what is research and development with relationship to my total revenue? That's 1.18%. What about SG&A like general sales and administrative expenses? How does that relate to my operating revenue? That's 12%. Woo, well, look if I am paying 80.88 in the dollar for my materials and I only have 19 cents left, and I got little over 1% in R&D and another 12% on SG&A, then how much money do I have left? Well, 4% like that's how much you have left for other things. Wow, is that good, is that bad? Well, that's where the analysis comes in and that's where your MBA degree comes in to play. How do I evaluate what that number means? How do I anticipate if that's a good thing or a bad thing? How do I put that into perspective? What we're trying to avoid here is that, putting yourself in a situation where you don't even know how that number came about. How do I get 4.11? It's a pretty straightforward calculation. You're taking your operating income as a ratio of your operating revenue, okay? And so, we can do that all the way along here. So I'm going to show you a trick that you can use. If you want to manipulate the reference cell on this but have the denominator constant, you can create this little trick here. And so by putting in a dollar sign in front of the B and the 15 here, what it does is it holds that cell constant and allows you to then drag this down here and calculate percentages for everything, right? And of course if there's no value here it gives you an error term. But, now I've got 82% with depreciation, my gross margin is 90%, period of SGNA is 12%, my operating income is 4%, EBITDA 5.2%, right, my net operating income is 2.71%. So it's, look at this one more time, by putting the dollar sign around the B and the 15, so $b, $15. What I'm doing is I'm holding that little cell constant right there, which allows me to drag and drop and manipulate this down here and it keeps that calculation constant. If I don't put that little dollar sign right there, what will happen is it will look at this ratio of 17 to 15 as I move it down, it'll say, 20 to 18, or 22 to 20, or 24 to 22. It will just keep changing my denominator here, and that's not what I want, all right? So, the percentage is pretty straightforward. How do we use it or how would it be used for an example, I can engage in what's called a vertical analysis like that's what this is. The vertical analysis is my expenses as a percentage of my sales, my EBIDTA as a percentage of my sales, my gross margin as percentage of my sales. And I can do this then for every single year. Now I'm going to do the same thing here, I'm going to put this little dollar sign around this guy right here. And, what I can do then here is I'm going to copy this down. And look, now I've got percentages, I've got percentages all the way down. And I'm going to do it for each of these columns one more time here. Okay, I put little dollar signs around here. And then to copy that guy down one more time. And then do it one more time yet. Now you notice this last one, it says one, I'm going to turn into percentages here. It's my little dollar signs there. And then I'm going to copy this all the way down here. Now what might happen as part of your MBA studies is that you'll be asked to look at the vertical analysis which is, what it is, it's like gross margin. Gross margin is a percentage of my sales, so my gross margin is 19%. So, after I get done with my COGS, how much money do I have left over? And then I might have to evaluate that over a period of time. And so, what I'm looking at is is this set of numbers here. So I'm looking at this guy in relationship to this, as a relationship to this, as a relationship to this. And then trying to access what's going on with the trend of my gross operating profit. So my gross operating profit is going from 17 to 20% to 19% to 19%, so, it increased from 2007 to 2008 but then it decreased slightly from 2008 through 2009, right? Well, I might be looking at my EBITDA margin here. So, this guy relationship to this, relationship to this, relationship to this, right? And say, okay, so my EBITDA margin was 6%, now has been driven below 6% to a little less than 5 and 3 quarters. All right, that's not a trend that I like to see. I don't like to see my EBITDA margins being driven down. This is a profit margin, if you will, right? And it's a percentage, so it's like, okay, now that I have calculate this percentage, I can do something with it. I can analyze it, I can then enact strategy, enact policy, try to understand what's happening in the industry, try to understand what's happening with the organization. And the truth is that pouring over your financials means that you have to become more comfortable with these percentages. These percentages are going to be talked about in your classes as profits, as margins. It's a very, very straightforward calculation, that analysis of calculation is why you're engaging in the MBA. But doing the calculation should be straightforward and we certainly don't want it to become a hurdle for engaging in the much deeper dive analysis that you're going to be doing in your accounting classes, ops classes, finance and what have you. To see if you can replicate this, this is available as a download, this income statement here, and see if you can calculate these percentages. See if you can do them for each one of these years, and see if you can get these same numbers
