Wednesday, November 3, 2010

Does your company make money?

 

I have always believed that investing for income is not that hard. I think most people are totally capable of investing the portion of their savings that is used to create income. Most people also say they just do not have the time. Then, learn the simple principles behind my income investing strategy and make sure you work with your adviser or broker to create the results you want.

A friend of mine who has not had such good luck with her broker suggested that I make sound simple. How does she start?

Simple investing comes from using simple principles. For instance you should invest in companies that make money and share it with you. This is a pretty simple concept. Yet how often have investors not followed that principle. The limited partnership mania of the 1980's where investors put their money into investments that had guaranteed loses so the investor had a tax advantage. The dot.com mania of the late 1990's when investors put their money into companies that made only promises to make money. The real estate mania of the 2000's when investors put their money into another house they were sure they could flip in 6 months. None of these ideas is appropriate for an income investor.

Find a company that makes money. How do you measure making money? Begin with finding out if the company you are considering has revenue. Simply look at the financial results and you will see if they have sales and revenue.

Next we need to find out if after the company pays its interest and taxes, and all the operating expenses, it has money left at the end of the day. This left over money is called profit.

The accounting industry spends a lot of time measuring profit and I cannot expect you to become an accountant overnight so let us keep it simple and look for the easiest way to measure profit.

Profit is called the bottom line, or net income or net earnings. Some very sophisticated measures such as free cash flow will increase your understanding of how a company works but the easiest measure of profit for you, as the average investor, is to find out the company's earnings per share (EPS.) EPS is available on all the financial sites.

Income investors who keep it simple will benefit from time efficiency. This is one of the first of my four criteria to determine if you should invest in a company. Eliminate all companies that do not have sales, all companies that do not have earnings.

Only companies that make money have the option of paying out some money to you and for income investor's income is everything.

Later this week I will discuss looking at a company's ability to pay interest on their bonds.

Tuesday's election results are all the talk right now and I have waited to the end of this post to comment. Income investors are always looking for opportunities to buy a stock cheap. If you can figure out how the election results will create a cheap investment then you should pay attention. However, for most income investors, you need to be agnostic on the election results and stick with our principles of how to invest for income.

By the way, I think eventually you will be able to buy bonds cheaper and cheaper because eventually inflation will rear its ugly head. This is why you need to start now to understand how to determine if a company can meet its interest payments.

Very Truly Yours,

TheMoneyMadam