Where's the cash going?

We’re down to the last two financial statements, Statement of Cash Flows and the Retained Earnings Statement.

The statement of cash flows shows where the business got its cash during a particular period of time and how that cash was used.

The retained earnings statement shows how much previous income was distributed to shareholders in the form of dividends and how much was kept to allow for future growth.

The statement of cash flows is useful for answers questions like: Read the rest of this entry »

Balance sheets - assets vs. liabilities

Before we delve into the other three financial statements let me stop and add a few caveats about financial ratios and financial statements.  Using either to compare one company with other similar companies can give you a good idea of the businesses’ financial health but differences in accounting methods make it difficult to get a true apples-to-apples comparison.

For example, if one company values its inventory using last-in, first-out (LIFO) and the other uses the average cost method then you can’t accurately compare their inventory valuations and cost of goods sold.  This is just accounting-speak for saying the one company assumes it sells or uses its newest inventory first, and that’s what gets reported, and the other company averages the cost of its entire inventory.  Neither way is wrong, and we don’t need to get bogged down in the details, I’m just making the point that you can’t come to an accurate conclusion about a company’s finances by looking at a few pieces of information. Read the rest of this entry »

Financial Statements

Companies communicate what their assets, liabilities, expenses, and revenues are in four different financial statements:

- The balance sheet shows at a particular point in time what a company owns (its assets) and what it owes (its liabilities).

- The income statement shows how successfully the business performed during a period of time by reporting its revenues and expenses.

- The retained earnings statement shows how much previous income was distributed to shareholders in the form of dividends and how much was kept to allow for future growth.

- The statement of cash flows shows where the business got its cash during a particular period of time and how that cash was used.

For a real world example of a company’s financial statements we’ll use ABM Industries, Inc. (ABM), a buildings maintenance and services company I picked for Financial Samurai’s Samurai Fund.  Read the rest of this entry »

What's the retail value of your stocks?

If you’re shopping around for a new or used car it’s good to know the retail value of the vehicle so you’ll know if you’re getting a good deal or paying too much.  Wouldn’t it be nice to know the retail value of your stocks?  Some people think this number is the market capitalization, or the number of shares outstanding times the stock price, but this doesn’t take into consideration a company’s debt or its available cash.  A better way to gauge the price of a stock is too ignore the hype around a company’s stock price and focus on the company’s underlying value, or the Enterprise Value.

Enterprise Value is what you would pay if you were taking over a company. It’s the equity value of the company + the market value of its debt + minority interest (if applicable) – the market value of associate companies + the market value of preferred equity – cash and cash equivalents. Read the rest of this entry »

Learn how to analyze stocks like a pro

Ever wonder how the stock market gurus come up with their stock picks? Stock analysts don’t use a Magic 8 Ball, consult with psychics, or letter combinations from their Alpha Bits cereal to pick stocks.  Not that what they do isn’t a little arcane, they divine the future price of stocks by rearranging different number combinations related to the performance of companies.  These number combinations are financial ratios and something you’ll fully understand once you’ve read this series of articles.  By using these ratios yourself you’ll be better able to make your own stock purchase decisions and minimize your risk, just like the pros. Read the rest of this entry »

My (virtual) million dollars

If you haven’t tried it yet head on over to UpDown.com and sign up for their free stock market game.  The trading simulation is extremely realistic and they give you $1 mee-lee-un dollars to play with.  It’s like fantasy football for stocks, and if that wasn’t incentive enough they have a monthly contest where the winners get a shot at $3,000 in real money for managing their virtual money well.

The rules are:

- Be on the site on or before the 7th of each month to be automatically entered,

- Perform better than the S&P 500 during the contest period (currently 4.93%), Read the rest of this entry »

Trade your dollars for gold

Its common knowledge the price of gold is inversely proportional to the value of the dollar – that is, when one goes up, the other goes down.  At least, it has ever since the Nixon Shock in August 1971when President Nixon changed the valuation of the dollar from gold to an open monetary exchange.  And we hear every day more evidence of the growing weakness of the US dollar – the yields on Treasuries go up, the cost of crude oil increases, concerns about inflation from the Fed.  So what do you do about the devaluation of the dollar?  You can’t hoard your cash because of inflation and devaluation, so you have to invest it in something.  Banks and bonds are yielding microscopic returns so that just leaves the stock market.  Here are four stocks to take advantage of: Read the rest of this entry »

Six recession-proof stocks are doing pretty well

All six recession-proof stocks I picked have since been mentioned on sites like Jim Cramer’s The Street, Zacks.com, MSN Money, and the Motley Fool.  Dollar Tree (DLTR) was picked as one of Jim Cramer’s Top 5 Value Stocks, Family Dollar (FDO) was picked as one of TheStreet.com Halloween Winners, Eli Lilly (LLY) was featured in MSN Money’s 3 Stocks for a Stock Picker’s Market, Monro Muffler (MNRO) was identified as one of TheStreet.com Top 5 Mid-Cap Stocks,  and the Motley Fool published an article yesterday about O’Reilly Auto Parts (ORLY) titled “3 Stocks That Blew the Market Away”. Read the rest of this entry »

Ford (F) stock jumped 10% this morning after reporting a “surprising” 3^rd quarter profit, and I’m surprised that everyone is surprised.  If Cash for Clunkers was such a success shouldn’t it stand to reason Ford, GM, and Chrysler would all report higher 3^rd quarter profits?  Maybe they believed Ford CEO Alan Mulally when he said Ford was profitable without the cash for clunkers program.

Edmunds.com reported Clunkers only generated an additional 125,000 car sales above what they would normally be, and at $3 billion for the Clunkers program the cost/vehicle comes out to be $24,000 ($3B/125,000).  The White House vehemently disagreed, but their counter-argument was based on predictions, not actual sales numbers.

I wasn’t a fan of this program before it started and the Edmunds.com story reinforces my opinion.  As much as I would love for the government to come up with a tenable plan to jump start the ailing auto industry any resulting gains aren’t sustainable.  As soon as the money dries up so will the sales, even if the economy takes off.    An underlying problem of the economy is consumers have too much debt and not enough savings, so what did the Obama administration propose to do?  Talk consumers into giving up more of their savings, assume more debt, and trade what was probably a working vehicle with a free and clear title for a new vehicle payment.

Read the rest of this entry »

Stocks for this economy - Part 3

In the first article we discussed how to use finance.yahoo.com to research market sectors, examined the financial ratios of a few interesting stocks, and used moneycentral.msn.com to do a quick technical analysis of six stocks.  We narrowed our search down to sectors that should be relatively safe during the economic downturn so we looked at Drug Stores, Discount Variety Stores, Consumer Services and Auto Parts Stores in the Services sector, and Major Drug Manufacturers in the Health Care Sector. Read the rest of this entry »