It is not an often case that interest expenses are expenses that have to be subtracted from sales, but we have to be careful with a company, which has a lot of interest expenses, because the more debt makes the company spend more money for interest expenses.
Bear Stearns, the main cause for the subprime mortgage crisis in the US, had 70% of the ratio of interest expenses to operating profit. However, the ratio of interest expenses skyrocketed up to 270% at the end of 2007, and Bear Stearns was taken by JP Morgan at a giveaway price.
1. Interest expense: Interest paid in the fiscal quarter or year.
2. Gain on disposition of assets (or loss): Money obtained by selling assets (excluding inventories). If a company sells at a cheaper price than depreciation, it will be lost.
3. Other non-operating income (or loss): Includes profit on exchange, profit on derivatives trading, and profit on disposing stocks.
4 Incomes and loss before incomes tax: Net income before subtracting corporation tax.
Among four things that we covered today, the most important thing is interest expense. For that reason, we therefore have to choose companies having a low interest expenses ratio to operating profit. There are, of course, rare exceptions though, companies with a long-term competitive advantage usually have a lower interest expenses ratio of less than 15%.
Gain on disposal of assets and other non-operating incomes are one-off, so we don't need to care about it deeply. Incomes and loss before incomes tax can be used to compare the investing in one company with another investing in another company by considering the net income of the company on a pretax basis. This consideration is useful when comparing stocks of companies with a long-term competitive advantages.
No comments:
Post a Comment