1. (c) 2001 Contemporary Engineering Economics 1 Before making Financial Decision – understand financial situation Accounting records to aid in making decisions What is the company’s financial position at the end of fiscal period? How well did the company operate during the fiscal period? Where did the company decide to use their profits for? How much cash did the company generate and spend during the period? Role of Engineers – plan to ensure project’s profitability Looking back….

2. (c) 2001 Contemporary Engineering Economics 2 Key Summary of Dell’s Financial Statements

3. (c) 2001 Contemporary Engineering Economics 3 Key Summary Continued

4. (c) 2001 Contemporary Engineering Economics 4 Using Ratios to make Business Decisions Stockholders are concerned with future earnings and dividends Creditors are concerned with the company’s ability to repay its debts managers are concerned with the company’s ability to finance future expansion Engineers are concerned with planning actions that will influence the future course of business events

5. (c) 2001 Contemporary Engineering Economics 5 Debt Management Analysis Ratios that show how a firm uses debt financing and its ability to meet debt repayment obligations Debt ratio Times-interest-earned ratio

6. (c) 2001 Contemporary Engineering Economics 6 Debt Ratio What It Measures: The extent to which a form uses debt financing How You Compute: The ratio of total debt to total assets

7. (c) 2001 Contemporary Engineering Economics 7 Time-Interest-Earned Ratio What It Measures: The ability of the firm to meet its annual interest payments How You Compute: The ratio of earnings before interest and taxes (EBIT) to interest charges

8. (c) 2001 Contemporary Engineering Economics 8 Liquidity Analysis Ratios that show the relationship of a firm’s cash and other assets to its current liabilities Current ratio Quick ratio

9. (c) 2001 Contemporary Engineering Economics 9 Current Ratio What It Measures: The extent to which the claims of short-term creditors are covered by assets How You Compute:The ratio computed by dividing current assets by current liabilities

10. (c) 2001 Contemporary Engineering Economics 10 Quick (Acid Test) Ratio What It Measures: The firm’s ability to pay off short-term obligations without relying on the sale of inventories. How You Compute: This ratio is computed by deducting inventories from current assets and dividing the remainder by current liabilities.

11. (c) 2001 Contemporary Engineering Economics 11 Asset Management Analysis A set of ratios which measure how effectively a firm is managing its assets Inventory turnover ratio Days sales outstanding ratio Total assets turnover ratio

12. (c) 2001 Contemporary Engineering Economics 12 Inventory Turnover What It Measures: How effectively a firm is managing its inventories. How You Compute: This ratio is computed by dividing sales by inventories

13. (c) 2001 Contemporary Engineering Economics 13 Days Sales Outstanding What It Measures: The average length of time the firm must wait after making a sale before receiving payment (also known as, average collection period) How You Compute: The ratio computed by dividing accounts receivables by average sales per day

14. (c) 2001 Contemporary Engineering Economics 14 Total Asset Turnover What It Measures: How effectively the firm uses its plant and equipment in generating its sales How You Compute: The ratio computed by dividing sales by total assets

15. (c) 2001 Contemporary Engineering Economics 15 Profitability Analysis A set of ratios which show the combined effects of liquidity, asset management, and debt on operating results Profit margin on sales Return on total assets Return on common equity

16. (c) 2001 Contemporary Engineering Economics 16 Profit Margin on Sale How It Measures: the profit per dollar of sales How You Compute: Computed by dividing net profit after taxes by sales

17. (c) 2001 Contemporary Engineering Economics 17 Return on Common Equity What It Measures: The rate of return on common stockholders’ investment How You Compute: The ratio of net income after taxes to common equity

18. (c) 2001 Contemporary Engineering Economics 18 Market Trend Analysis A set of ratios that relate the firm’s stock price to its earnings and book value per share P/E ratio Market/book ratio

19. (c) 2001 Contemporary Engineering Economics 19 Price/Earnings Ratio What It Measures: The dollar amount investors will pay for $1 of current earnings How You Compute: The ratio of the price per share to earnings per share

20. (c) 2001 Contemporary Engineering Economics 20 Market/Book Ratio What It Measures: Indicates how investors regard the company – a higher ratio indicates that investors are willing to bet a higher return on investment How You Compute: The ratio of a stock’s market price to its book value