Money Rehab with Nicole Lapin - Mind Your P's and L's

Episode Date: August 15, 2022

Ever wish the companies you invested in got report cards? Your wish has been granted! Nicole explains.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. I'm going to save you from any confusion and tell you right away what P&L is.

P&L is the nickname for basically the spreadsheet that companies use to track their profits. That's the P. And losses. That's the L. If you're ever walking around a corporate office and you hear someone reference this really fast, it may come across sounding like P-N-L. Well, I told you I would save you from the confusion because someone else has already checked the confusion box, and that would be moi.

Early on in my career when I was covering Wall Street, when I heard people talk about P-N&Ls, it sounded like gibberish to me, complete alphabet soup. In fact, one time a boss of mine who used to call me NL for short asked me if I had to P&L or the P&L when I was leaving the office to go cover a story. And I seriously thought he was asking me if I had to P and L. While P and Ls have nothing to do with going to the bathroom, a P and L can tell you whether a company is going down the toilet. At the most basic level, a P and L aims to show you the net profit of a company.

In other words, how much the company is actually making after expenses. The formula to calculate this for yourself is money coming in, which is made up of things like sales, licensing, deals, and so on, minus money going out, which is made up of all the expenses like office space, payroll, equipment, travel expenses, manufacturing costs, and so on. That equals a company's net profit. So again, the equation is money coming in minus money going out equals net profit. The simplest and perhaps oversimplified rule of thumb is that you want to invest in companies that have impressive net profit numbers and are reporting increases in profit year over year. Even though the cliche is to assume that the simplest answer is normally not the best one,

I wouldn't agree here. I would actually opt for the more complex answer that factors in why net profit may not be growing year over year for a particular company. I'll tell you why. Let's imagine that you're deciding between investing in one of two companies, the money rehab company and the lame company. And to help you make your decision, you're looking over the respective P&Ls. In the money rehab company P&L, you see that in 2021, the money rehab company reported a million dollars in profit and then next year reported a million dollars in profits again.

In other words, the same profit year over year. So not the growth we're necessarily looking for, but still a good amount of money. In contrast, you see in the lame group P&L that the company reported a million dollars in profits in 2021, and then the next year had $1.5 million in profits. According to that data, the lame group is actually showing signs of year-over-year growth while the money rehab company is staying stagnant. Plus, increasing profits tend to increase the perceived value of a stock. So this could signal to you that the lame group shares will be more lucrative for you in the near future. However, what if you asked me for the full P&L and I told you this? From 2021 to 2022, the money rehab company had increased gross profits but ended up at a million dollars net profits after subtracting increased expenses. And you see that the increased expenses are going toward office

space, payroll, and product development costs. And the lame company decreased their expenses from 2021 to 2022 by spending less on payroll and office space. How does this complicate our picture of the two companies? Well, while we know that the money rehab company net profit stayed the same from 2021 to 2022, there was growth in both gross profit and expenses. But take note of the type of expenses because that's really important. Increasing payroll and office space expenses implies that the company is growing, right? The money rehab company needed to spend more on payroll because they're hiring more folks to do dope things and they needed more office space for said employees doing said dope things. Furthermore, increased expenses for product development implies

that the money rehab company is working on some sort of exciting new offering that could lead to increased sales and therefore increased profits. Yay! In short, in some cases, high expenses are not a good sign. But when expenses are actually the company investing in itself, that is a good sign. On the flip side, the lame group P&L is not telling a good story. Yes, the net profit increased, but mostly because the expenses decreased. Specifically, the lame group cut payroll and office expenses, which likely means that employees were laid off and branches were closed. And those are bad signs for investors. So don't get me wrong. I'm not saying that high expenses are always a good sign. For example, if you invest in a winter jacket company and you see that they have $500,000 of new travel expenses, sure, that could be legit.

It could be a biz dev trip. But then when you dig a little deeper and you see their CEO post glamour shots of their business trip to Barbados? What business is a winter jacket company doing in Barbados? Probably funny business. For today's tip, you can take straight to the bank. You can try this analysis at home by choosing one of your favorite companies and looking over their P&L statements. This exercise doesn't have to be boring. If you choose a company you know and love, dare I say, you'll find this interesting. And the P&L may prove to be a treasure map that gives you hints around when your favorite company's next core product is coming out. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers

are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.