- All right Kay, I understand you're a huge baseball fan.
- Bit of a fan, that's right.
- So what's your favorite Major League team?
- Well that's easy, the New York Yankees.
The Yankees are the most successful
baseball franchise in history.
As of the end of 2018, they had won more world championships
than any other team, 27.
The second most, the Cardinals with 11,
less than half as many.
And the Yankees' arch enemies, the Red Sox
have only won nine World Series Championships.
- So, how have your Yankees done recently
and how 'about those Red Sox?
- Well, okay the Yankees haven't won anything
since 2009, and the Red Sox won the World Series
in 2013 and 2018.
- There you go, so when it comes to the Yankees,
it looks like you're putting too much weight
on old historical performance and not enough
on more recent performance.
For the Red Sox, two World Series
in the past six years, that's not bad.
- Okay fine, this is a financial analysis course
ladies and gentlemen, so let's talk
about some financial facts.
In 2018 for example, the Red Sox
had the highest payroll in Major League Baseball
at $240 million.
- So it looks like Boston was able to buy a World Series.
- Yeah well in 2018, they won the World Series,
but they had a pretty high payroll
in other years without the same result.
The Yankees still had a pretty high payroll in 2018,
$173 million.
- Well with such a large payroll,
why aren't the Yankees winning more games?
- Now now, well well wait, it's a complicated issue.
Key injuries, an aging roster,
some unfortunate hitting troubles at home.
- Yeah exactly, turns out in your discussion
of the Yankees, you've highlighted some
of the key points about the pitfalls
of financial statement analysis.
- I have?
- Yeah, you have.
You have to be careful about putting too much weight
on past performance.
Those 27 long ago World Championships for the Yankees.
You have to make sure you give extra consideration
to more recent data.
Also, most situations are much too complicated
to be summarized in just one or two financial numbers,
such as player payroll.
- Okay, so are there any other potential pitfalls
in financial ratio analysis?
- Oh yes, now let's talk about those.