Showing posts with label D/E ratio. Show all posts
Showing posts with label D/E ratio. Show all posts

Tuesday, October 26, 2010

More Balance Sheet Issues to Consider.

This post is a continuation of your studies into the balance sheet of your stocks.

You are investing for both current and future income; right? So you selected companies that pay you dividends or bought a bond to pay you interest. As you watch the markets gyrate up, down, and sideways, you are concerned that, at this point in your life, you cannot afford to have your investments go belly up.

Your safest move is to make sure you invest in companies or lend your money to companies with a solid balance sheet. Companies with a solid balance sheet have the reserves to pay their dividends when times get tough and enough cash flow to cover their interest payments.

For instance: could diaper rash cause your investment to lose value? Yes. Look at the woes of Proctor & Gamble (PG.) Could Europe's troubles affect the value of your holdings in Coca Cola (KO?) Yes. Look at the slide of the Euro dollar and find that KO may suffer from that occurrence. 

Each of these companies is a hold because they have strong balance sheets and constantly increasing dividends.

I am not asking you to be an economist. The point of this post is; if you invest your money in a company that pays a good dividend and increases that dividend over time and has a cash reserve to get through tough times, your income is most likely safe even though the stock price moves up and down. Plus it is highly unlikely that your investment will go "belly up."

Your  job as a worried income investor and as a student of income investing is to determine the balance sheet strength of your investments by learning the D/E ratio of each of your investments.
Read my previous post on learning how to determine the debt to equity ratio (D/E ratio) of your investments.

Very Truly Yours,

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Monday, October 25, 2010

Learn about Debt to Equity ratios to screen for stocks.

Let's determine if you selected income producing investments with a good balance sheet.

What does that mean? 

How do you determine if your investments have a good balance sheet?

I use many sources to help me determine how to invest. I am trying to narrow my work for you and I recommend that the quickest way for you to get an overall view of your investments' balance sheet strength is to determine the debt to equity ratio (D/E ratio.) 

Go to any financial information site such as your brokerage site maybe at Schwab or Fidelity or use Daily Finance or MoneyCentral.  Type in the symbol of the company in which you have an investment.

Now look under the category Fundamentals or Financial Results. Every site has information on the stock's financial results.  Look through this area and you will find a number called the debt to equity ratio D/E ratio.

Debt is measured just like your personal debt.  How much money does the company owe.  Equity is the value of each share.  Therefore if the debt to equity ratio is 1, the company has a dollar of debt for every dollar of equity.  

Generally speaking, I prefer companies with a D/E ratio less than 1.  However, some companies need to carry a lot of debt to fund major equipment purchases.   If you have a company with a D/E ratio greater than 1 but like all the other aspects of the company, your next assignment is to compare this company with a similar company and to learn about the industry average D/E ratio.   

A good example of this research is to compare Caterpillar (CAT) and Deere (DE).  Each company carries a lot of debt because their equipment is so expensive they cannot pay cash.  CAT has D/E ratio of 2.91 but DE has a D/E ratio of 3.9 and the industry average is 2.2.  So I would pick CAT rather than DE.

I want to emphasize, again, our rules for income investing.  Buy a company that makes money, shares it with you in a dividend, increases the dividend over time and has a strong balance sheet or a low D/E ratio.

Review every stock you own and decide if you have solid companies.  You'll be happy you did your homework.

Very Truly Yours,

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