2011e4403lecture4-6_Complete

2011e4403lecture4-6_Complete - IEOR E4403 Advanced...

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0 Professor Sadighian Lectures 4-6            IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011
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IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011, Profs Sadighian & Kachani Outline of the Course Syllabus: Evaluating Economic Performance of Companies and Industrial Projects Profitability Analysis Turnover-Control Ratios Leverage and Liquidity Analysis Discrete and Continuous Compounding
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IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011, Profs Sadighian & Kachani Evaluating Financial Performance Profitability ratios Turnover-control ratios Leverage and liquidity ratios “You can’t manage what you can’t measure” William Hewlett
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IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011, Profs Sadighian & Kachani Evaluating Financial Performance Return on Equity (ROE) = Net income / Shareholders’ Equity Return on Assets (ROA) = Net income / Assets Return on Invested Capital (ROIC) = EBIT ( 1- Tax rate) / (Interest- bearing debt + Shareholders’ equity) Profit Margin (PM) = Net income / Sales Gross Margin (GM) = Gross profit / Sales Price to Earnings (P/E ratio) = Price per share / Earnings per share Profitability ratios
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IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011, Profs Sadighian & Kachani Evaluating Financial Performance ROE =Net income/ Shareho lders ’ Equ ity = (Net income/Sales) x (Sales/Assets) x (Assets/Shareholders’ Equity) = Profit margin x Asset Turnover x Financial Leverage I.S. Left B.S. Right B.S. ROE is not a reliable financial yardstick: Timing problem Risk problem Value problem Return on Equity
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IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011, Profs Sadighian & Kachani Avg. gross margin for EBIT breakeven 0 10 20 30 40 50 60 70 0% 20% 40% 60% 80% 100% PRODUCT, CUSTOMER & SEGMENT PROFITABILITY Source: McKinsey & Co. Net sales $ Millions Gross margin Percent Current avg. gross margin Avg. gross margin to reach x% ROIC
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IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011, Profs Sadighian & Kachani SEGMENTS PROFITABILITY BASED ON ROIC ROIC % EBIT Millions $ A B C 12% -40% -20% 0% 20% 40% 60% -2 -1 1 2 3 4 5 6 7 8 9 10 x C % of production and y C % of net revenue x B % of production and y B % of net revenue x A % of production and y A % of net revenue Source: McKinsey & Co.
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IEOR E4403 Advanced Engineering and Corporate Economics Fall 2011, Profs Sadighian & Kachani Evaluating Financial Performance Asset Turnover = Sales / Assets Fixed-Asset Turnover = Sales / Net property, plant and equipment Inventory Turnover = Cost of goods sold / Ending inventory Collection Period = Accounts receivable / Credit sales per day (Use sales if credit sales unavailable) Days’ Sales in Cash = Cash and securities / Sales per day Payables Period = Accounts payable / Credit purchases per day (Use COGS if credit purchases unavailable ) Turnover-control ratios
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2011e4403lecture4-6_Complete - IEOR E4403 Advanced...

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