The second calculation that I showed you was the percentage change. This might be used in financial statement analysis when engaging in what we call a horizontal analysis. Horizontal analysis is, we're looking at the same company, but we're looking at how the company changes over a period of time. So you might be interested in what's happening to sales. So if sales increase by a certain percentage over a period of time or what's happened to expenses. Or even if you're doing a deep-dive in expenses, what's happened to variable expenses or what's happened to fixed expenses in that period of time. So let me show you on this spreadsheet right here. Again, this is my Dell income statement, and I'm looking at percentage changes. Now, have an income statement from 2007, 2008, 2009, 2010. If I have these four years, I can actually engage in three years of percentage changes. So here's what I'm going to do. I'm going to show you what the calculation is here in general. Remember, we're going to take the new value minus the old value as a ratio of the old value. So here, if I wanted to do a percentage change in my revenue, how has my revenue grown? I'm saying, what is my new revenue, like the revenue in January 2008 subtracting the revenue in 2007 as a ratio of the revenue in 2007? I get 0.06446. I turned this into a percentage here at a couple of decimal places, and I get 6.47 percent. So the percentage change from 2007 to 2008 is 6.4 percent. I'll do this calculation again here. I want to do it slightly different. I'm going to show you that these two things are equivalent. I could take the new value. I'm going to take a percentage change from eight to nine. Here's my new value. Here's nine, as a ratio of my old value eight, and I'm just going to subtract one. So I'm getting this as a percentage less than negative 0.5 percent between this year and this year. I'm going to do it one more time here. Here's my new value minus my old value as a ratio of my old value, and I get negative 13 percent. Get these percentages. Whoops, here's my percentages here. So from seven to eight, I had a 6.4 percent increase in my revenue. Then between eight and nine, a very small, 0.05 percentage change in my revenue. But then between 9 and 10, I had a 13.4 percent drop in my total revenue. The value here is that I am able to then track what's happening to my company over time. So this is what's happening. My sales grew by six percent. Then they fell by 0.05 percent. Then they fell by 13 percent. I want to show you. I'm going to delete this and I'll show you what the other calculation here. If you want to take this new value divided by your old value over here, and then subtract one, this one you get the same thing, 6.4 percent. So we can copy this down here, and what's happening here is when I copy it down, it's still copying the same formula. So here's the new value over the old value minus one. Here's the new value over the old value minus one. So I copy this thing down or I can copy this thing down to get a set of trends, like what's happening over here. So here, my gross margin improved by 22 percent between these two years. That sounds really great. So what happened? Why was my gross margin between 2007 and 2008 able to increase by such a large percentage? Well, is it because I had a growth in my COGS, but the growth of my COGS was less than the growth in my operating revenue? Yes, absolutely. So in analyzing these percentage changes, I'm able to understand the trends, I'm able to understand what my company might be up against so that I can start enacting or thinking about different policies, thinking about whether or not my company's going to have more value, thinking about whether or not my company's in trouble. I can copy these formulas down all the way across from the top to the bottom here so that I can start understanding what's happening in terms of my net income or what have you. So I'll do that for each of these three all the way across here. So my net income here, the first between 2007, 2008 my net income went up by 14 percent. My net income decreased by 15 percent, and then my net income decreased by 42 percent. The reason that we engage in these analysis and the reason that we're looking at more than just one value here, is because I want you to notice this. Look, my sales between 2009/2010, my sales decreased by 13 percent. My net income decreased by 42 percent, is one of my profit margins. My EBITDA margin decreased by 23 percent. So my EBITDA margin is a very important margin as you will find out. If my EBITDA margin is increasing by 23 percent but my sales are only dropping by 13 percent, something else is going out of my company. My costs must be going up by a large fraction in addition to something else. So what's happening here is that, I have to get a handle on why these things are changing and what the relationship is, and what I try to understand is there something that I should be paying closer attention to? Is there something that's happening to my organization? Does it need attention? So how do I engage that discussion by engaging in the calculation of percentage changes? Two calculations: percentage by whatever I'm focused on as a ratio of the whole and percentage changes, the difference in two numbers as a ratio of the initial number. One of them tells you something like a profit margin. The second one tells you something like a change, a trend that you might be aware of. Again, you're going to be studying this stuff in your MBA. That deep dive is why you are taking the MBA to begin with, but you don't want the actual calculation to disrupt that study. So don't let it be a hurdle, it's a pretty straightforward analysis. Download this spreadsheet and see if you can replicate some of these numbers.
