Saturday, July 25, 2015

Really Bad Financial Analysis

There are times when we get a headache from slapping our foreheads after reading really bad financial analysis, especially when done by a well-respected S&P 500 company like Boeing. But, after reading this recent article, it may be a headache that lasts for a while. As you can read, the article states that Boeing loses $23 million on each 787 it sells. And while we understand Microsoft loses money on every XBox One, it makes up for those losses on the sale of each video game. So, we were wondering how Boeing was making up the losses on the sale of each 787 until we read this:

"Commercial jetliner programs typically lose money in the early years of production until the heavy upfront investments in engineering and production are repaid. Boeing's accounting spreads those costs over a large block of planes the company expects to deliver."

In other words, Boeing is losing money only because they are spreading the initial cost of the project over the life of the project! Accounting for the initial cost of a project in this manner not only violates a basic tenet of capital budgeting, but gives a misleading profitability number to investors.