All right, this topic has to do with ratios and ratio analysis. A ratio is really just one number relative to another number. Now, before we get into it, I just want to point something out, and I want you to think about this. So here it is, I have my handy-dandy Emory calculator. I have several hundred of these things in my office, and I'm going to throw this out there to you. Shoot me an e-mail and a self-addressed stamped envelope, and I will send you a Emory calculator, autographed, of course. I like to carry a calculator with me for back of the envelope types of calculations. We're doing a lot of stuff on Excel. But sometimes it's really handy to have just a real four function calculator, small four function calculator, where you can just jot down numbers and check things out. I'm going to do most of this next set of exercises using a little handheld calculator. You can do them on Excel, you can do them on a much bigger calculator, you can do them on your phone. But I find this to be very effective. The ratio analysis, as I just mentioned, is a way to look at one number in relationship to another number. So let's say, for example, that I'm 70 inches tall, and that my wife is 60 inches tall. If we were looking at a ratio, 70 to 60, we get a number, 1.16. It is just a number, 1.16. But now, it has, in that context as a spousal height ratio, it means something, perhaps. So, the spousal height ratio that I have to my wife is 1.16. What this means is every inch in height that I am, okay, really, actually more like every inch in height that she is, I am 1.16 inches to her 1 inch, right? So, she's 60 inches, I'm 70 inches. Every inch to her is 1.16 inches to me. Say what is this ratio good for? Maybe that there's a ballroom dancing exercise that you could do, and the judges are looking for a specific height, all right? So it could be that the 1.16 is the perfect height for two ballroom dancers. So the judge says, that's terrific. But you have to understand the context in which you're calculating a ratio. You have to understand what it means, and how you use it, its value to an organization. Now, remember, from where we're standing, we're trying to understand the finances and how we can make good decisions. So far, we've looked at a lot of financials and said, this is where this information is, this statement shows this type of information, this statement shows this type of information. The ratios are a way to start utilizing the information on the financials, and start answering questions about the health of an organization. So, let's look at some common ratios, identify how to calculate them, identify what may be a good ratio, what may be a poor ratio, and try to get a sense about where we stand on things. So one of the forms that we're going to make available to you is this little financial ratio equation sheet. We've got all the financial ratios written out for you, all right? What we're going to do is we're going to take the information from our Dell income statement, and our Dell balance sheet, and calculate some ratios. As I go, I'll talk about what the ratio means, how to calculate it, where the information is from, and we'll do the calculations ourselves. So, let's begin. The core concept of ratio analysis is trying to identify the financial flavor, the financial health, of an organization. And we do this by looking at the numbers that the organization essentially projects as it engages in business. So we're just going to go through a couple of these ratios here. So there's different types of ratios. There's solvency ratios and asset management ratios, debt management ratios, profitability, dividend ratios, okay? Other types of equations and ratios that tell us the health of the company. But we're going to start on these things called solvency ratios. So the first two solvency ratios we're going to look at is something called the current ratio and the quick ratio. Current ratio is a ratio that identifies how much total current assets we have relative to our current total current debt. For example, let's suppose that we have $70 million in current assets, and we have $6 million in current debt. We've already done this calculation. So the current ratio in that situation would be 70 divided by 60, or 1.16. What does that ratio mean? It means that we have $1.16 in assets, current assets, relative to $1 of our current debt. That means if, suppose that a bank calls us up, our organization up, and says we want our money. What kind of position would we be in if we've got $1.16 in assets, current assets, for every dollar in current debt, then we can liquidate our assets, sell them, and pay back our debt. So in general, a number greater than 1 means that we're financially strong enough to liquidate our assets to cover our current debt. What if we had a current ratio that is less than 1? Think about that for a second. That's right. If we had a current ratio less than 1, let's say it was 0.9, means we'd have $0.90 of current assets for every dollar we had in debt. It doesn't mean automatically we're in trouble, or we're going to go out of business. But what it means is if the bank calls us up and says where's our money, we would be hard pressed to fulfill those obligations. So that's the first one, current debt. Second one, current ratio. So that's the first one, the current ratio. The second one is the quick ratio. The quick ratio is sometimes called the acid-test ratio. Looks that your current assets minus your inventories as a ratio of your current liabilities. Why do you suppose we eliminate inventories from the quick ratio? So if you're thinking, well, our inventories, they're not really liquid. They can be liquidated, but we might have to take a haircut, if you will, on those types of assets. You're absolutely right. The reason that they're in inventory is because nobody's bought them. So if we have to liquidate them, we might have to lower the price in order to move them out the door. We cannot be a 100% certain that the value of those assets are, in fact, the value of the assets we think they are. So the acid-test ratio, or the quick ratio, says, hey, let's look at our assets, subtract our inventories, and identify whether or not we can cover our debt in absence of our inventories. So let's calculate both the current ratio and the quick ratio for Dell. And then we'll go into the universe and see if we can grab the numbers and calculate them for another company. So
