OUTLINE

							                    ENGINEERING ECONOMICS ISE460
                             SESSION 2
                       CHAPTERS 2, May 26, 2011

                              OUTLINE
   • Questions?
   • News?
   • Chapter 2 - Financials




Geza P. Bottlik                                    Page 1
                  ENGINEERING ECONOMICS ISE460
                           SESSION 2
                     CHAPTERS 2, May 26, 2011


                    Why study financials?




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                           ENGINEERING ECONOMICS ISE460
                                    SESSION 2
                              CHAPTERS 2, May 26, 2011


                  Chapter 2 – Understanding Financial Statements


    • If someone gave you $100,000, what would you do with it?




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                      ENGINEERING ECONOMICS ISE460
                               SESSION 2
                         CHAPTERS 2, May 26, 2011


                  CHAPTER 2 - FINANCIAL STATEMENTS


    • ACCOUNTING - KEEPING TRACK OF MONEY
    • FISCAL PERIOD - A 12 MONTH PERIOD SELECTED FOR
      ANALYSIS
    • INCOME STATEMENT - HOW MUCH PROFIT (LOSS)?
    • STATEMENT OF RETAINED EARNINGS - WHAT DID YOU DO
      WITH THE PROFIT?
    • STATEMENT OF CASH FLOWS - HOW MUCH CASH WAS
      GENERATED?
    • BALANCE SHEET - WHERE DO YOU STAND FINANCIALLY?
    • STOCK PRICE DEPENDS ON WHAT PEOPLE THINK OF THE
      COMPANY’S FUTURE

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                  ENGINEERING ECONOMICS ISE460
                           SESSION 2
                     CHAPTERS 2, May 26, 2011


                   Things to do with profits?




Geza P. Bottlik                                  Page 5
                       ENGINEERING ECONOMICS ISE460
                                SESSION 2
                          CHAPTERS 2, May 26, 2011


                        Things to do with profits


    • Buy back stock
    • Expand product line
    • Pay investors dividends
    • Profit sharing and raises
    • Research
    • Hire more labor
    • Acquisitions
    • Infrastructure
    • Retire loans



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                        ENGINEERING ECONOMICS ISE460
                                 SESSION 2
                           CHAPTERS 2, May 26, 2011


              How is the price of a stock determined? (08/16/05)




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                           ENGINEERING ECONOMICS ISE460
                                    SESSION 2
                              CHAPTERS 2, May 26, 2011


                  How do stocks look in the aggregate? (8/16/05)




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                     ENGINEERING ECONOMICS ISE460
                              SESSION 2
                        CHAPTERS 2, May 26, 2011


           CHAPTER 2 - FINANCIAL STATEMENTS (CONTINUED)


    • USING RATIOS TO MAKE DECISIONS
    • ABSOLUTE NUMBERS OFTEN ARE NOT MEANINGFUL - e.g.
      YOUR SCORE ON THE EXAM HAS ONLY MEANING WITHIN
      THE CONTEXT OF HOW IT COMPARES TO YOUR
      EXPECTATIONS AND THE PERFORMANCE OF OTHERS
    • PERCENTAGES ARE THE MOST COMMON RATIOS
    • THE BOOK LISTS 12 RATIOS THAT ARE USED FREQUENTLY




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                      ENGINEERING ECONOMICS ISE460
                               SESSION 2
                         CHAPTERS 2, May 26, 2011


                  CHAPTER 2 - CATEGORIES OF RATIOS


    • DEBT MANAGEMENT - HOW DO YOU GET YOUR CAPITAL?
    • LIQUIDITY - CAN YOU PAY YOUR DEBTS?
    • ASSET MANAGEMENT- INVENTORY AND RECEIVABLES
    • MARKET VALUE - HOW REALISTIC IS THE VALUE OF THE
      STOCK?
    • PROFITABILITY - HOW WELL ARE YOUR INVESTMENTS
      GENERATING PROFITS?




Geza P. Bottlik                                      Page 10
                     ENGINEERING ECONOMICS ISE460
                              SESSION 2
                        CHAPTERS 2, May 26, 2011


                  CHAPTER 2 - DEBT MANAGEMENT


    • DEBT RATIO = TOTAL DEBT / TOTAL ASSETS
           HAVE YOU BORROWED TOO LARGE A PART OF YOUR
            ASSETS?


    • TIMES INTEREST EARNED RATIO =
           EARNINGS BEFORE INTEREST AND INCOME TAXES /
           INTEREST EXPENSE
           CAN YOU EARN ENOUGH TO PAY THE INTEREST?




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                      ENGINEERING ECONOMICS ISE460
                               SESSION 2
                         CHAPTERS 2, May 26, 2011


                       CHAPTER 2 - LIQUIDITY


    • CURRENT RATIO =
           CURRENT ASSETS / CURRENT LIABILITIES
           DO YOU OWE MORE THAN YOU HAVE?
    • QUICK RATIO =
           (CURRENT ASSETS - INVENTORIES) /
           CURRENT LIABILITIES
           HOW FAST CAN YOU PAY YOUR DEBTS?




Geza P. Bottlik                                      Page 12
                     ENGINEERING ECONOMICS ISE460
                              SESSION 2
                        CHAPTERS 2, May 26, 2011


                  CHAPTER 2 - ASSET MANAGEMENT


    • INVENTORY TURNOVER =
           SALES / AVERAGE INVENTORY BALANCE
           ARE YOU MOVING YOUR INVENTORY FAST ENOUGH?
    • ACCOUNT RECEIVABLE TURNOVER (DAYS SALES
      OUTSTANDING) =
           RECEIVABLES / DAILY SALES
           ARE YOU COLLECTING FROM YOUR CUSTOMERS?
    • TOTAL ASSET TURNOVER =
           SALES / TOTAL ASSETS
           ARE YOUR ASSETS GENERATING SALES?

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                      ENGINEERING ECONOMICS ISE460
                               SESSION 2
                         CHAPTERS 2, May 26, 2011


                     CHAPTER 2 - MARKET VALUE


    • PRICE EARNING RATIO =
           STOCK PRICE / ANNUAL EARNINGS PER SHARE
           LIKE INTEREST (JUST A LOT LOWER)
    • BOOK VALUE PER SHARE
           (TOTAL STOCK HOLDER EQUITY - PREFFERED STOCK) /
           SHARES OUTSTANDING
           USUALLY MUCH LOWER THAN THE STOCK PRICE




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                     ENGINEERING ECONOMICS ISE460
                              SESSION 2
                        CHAPTERS 2, May 26, 2011


                     CHAPTER 2 - PROFITABILITY


    • PROFIT MARGIN ON SALES =
           NET INCOME / SALES
           HOW EFFECTIVE ARE YOUR SALES IN GENERATING
            INCOME?
    • RETURN ON TOTAL ASSETS =
           NET INCOME + TAXED INTEREST EXPENSE) /
           AVERAGE TOTAL ASSETS
           ARE YOUR INVESTMENTS GENERATING ENOUGH
            INCOME?




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                           ENGINEERING ECONOMICS ISE460
                                    SESSION 2
                              CHAPTERS 2, May 26, 2011


                  Is any of this applicable to personal finances?




Geza P. Bottlik                                                     Page 16