ASK THE FOOL
Earnings and Assets
Q: When IBM reported its earnings for the first quarter of 1999, they were up a whopping 46 percent. Yet at the same time, total assets dropped 5 percent. How can this be? -- S.R., Tampa, Fla.
A: Earnings and assets don't move in lockstep. Rising earnings are good, and falling assets are also often good. Remember that many components of net assets are items such as inventories and accounts receivable, which you'd ideally want to see at low levels.
If IBM's assets are falling, that might indicate greater inventory management efficiency or more rapid collection of money due. If assets such as property, plant and equipment are decreasing, this suggests that the business is getting "lighter," able to churn out more profit from less equipment.
IBM chairman and CEO Louis Gerstner Jr. explained, "Our operating results were excellent, led by services and software, which together produced 60 percent of our gross profits this quarter." IBM is becoming less of a capital-intensive manufacturing company and is increasingly engaging in lighter operations, such as selling software and services. IBM also spent about $2 billion buying back its own shares. This reduces assets and benefits shareholders.
Q: I heard Tom Gardner say on the radio that he prefers companies with lots of cash and no debt. Is this always a requirement? -- W.R., Livonia, Mich.
A: Not necessarily. True, companies with piles of cash have a lot of flexibility to act quickly when various opportunities arise. But many successful companies manage down their cash balances to near zero. They use the money to buy back shares and acquire other companies, among other things. If they suddenly need some cash, they draw on lines of credit available to them. Gillette is one strong company that does this.
THE FOOL SCHOOL
Gathering Company Information
You're intrigued by Wookie Cookies Inc. (ticker: CHEWY), and being a good Foolish investor, you want to research it. Simply give the firm a jingle and ask the investor relations department to send you an investor information package. (They're free!) Tell them you'd like to receive the most recent annual report, the latest 10-K and 10-Q reports, any recent press releases, and any available analyst reports. Alternatively, you can save a few trees by gathering the information immediately online at www.freeEdgar.com.
The annual report will probably feature glossy photos of smiling customers (or assorted alien life forms) chomping on cookies. But look to the back of the report, where the numbers will tell you the real story about the business. There are three main financial statements there. The income statement shows the company's sales and profits. The balance sheet lists assets and liabilities, such as cash, inventories and debt. The statement of cash flows reveals where cash is coming from and going to.
These statements also appear in the 10-Q and 10-K reports. The 10-K is issued once a year, along with the annual report, and 10-Qs are issued thrice a year, at the end of the intervening quarters. The 10-Q summarizes quarterly performance, while the 10-K features a lengthy discussion of the firm's operations and challenges.
Financial statements reveal how quickly sales are growing, how the company is financing its growth, how much profit it's making and much more. Pay attention to trends, to see if the firm's financial health is improving or declining. Compare the company with its industry peers to see how it stacks up.
Remember that you can improve your chances for success if you're actually a consumer of Wookie Cookies and are familiar with the company's offerings. Also, talk about the business with other investors, perhaps in an investment club.
Don't neglect online resources. Most company Web sites feature an investor information section, with press releases, financial statements, annual reports and answers to frequently asked questions. Investor information sites (like ours at www.fool.com) also offer a wealth of information on companies and communities of investors sharing information.
MY DUMBEST INVESTMENT
You've Got Spam
I received an e-mail last year suggesting that a company called Internet Stock Market Resources was rated "Very Strong Buy." I looked for any information on the company I could find. Most brokers had nothing on it. I couldn't find its financial statements. I looked at its Web site and found no useful info there, either. But I figured that someone more knowledgeable than me liked it, and it was cheap, so I bought. It fell from $1.75 per share to $0.56, and I lost a thousand dollars. The moral: Delete all unsolicited e-mails concerning "Strong Buys" and don't buy any stock that you can't get any information on! Now I'm investing Foolishly and am much happier. -- D.M.V., San Pedro, Calif.
The Fool Responds: Great lesson. Your instinct to research the company was excellent -- stick with that instinct and visit us online for research tools. There's a lot of unsolicited junk e-mail clogging people's in-boxes these days. It's referred to as "spam," and it isn't worth the bytes it's carried on.
I began as a small New Jersey payroll processing enterprise. Today I'm one of the biggest independent computing service firms in the world, with more than 425,000 clients. I cut checks to some 30 million employees last year -- perhaps yours were among them. An outsourcing pioneer, I've achieved 151 consecutive quarters of record highs in both revenue and earnings per share. In fact, I've never experienced a down year in my 50 years of existence. In 1998, I raked in more than $5 billion. My return on equity tops 20 percent. Who am I?
Last Week's Trivia Answer: My founder's first two names were Leon Leonwood. Created in 1912, I was the first national mail-order outfit to offer items such as hunting shoes. I'm known for my 100 percent satisfaction guarantee as well as my golden rule, to sell good merchandise at a reasonable profit and treat my customers like human beings. My flagship store has been open 24 hours a day, 365 days a year since 1951, and I handle up to 180,000 phone calls per day. My sales top $1 billion annually. You can't buy shares of me, though, as I'm not publicly traded. Who am I? (Answer: L.L. Bean)
The Fool Take
Dueling Dot Coms
BarnesandNoble.com recently became publicly traded, brought out by parent bookseller Barnes & Noble, which raised about $422 million with the offering. Investors looking for another Amazon.com should take a moment to consider the company's strategy, however.
Amazon.com's stock really took off last year when investors began to understand that the company was becoming more than just an online bookseller. Amazon's strategy of moving into new "vertical" retailing segments such as CDs, videos, the drugstore business, auctions and so on demonstrated that it wasn't confining itself to one sort of product.
Amazon.com is well on its way to pushing into additional categories, such as the online supermarket business. This means the current value of the company is based on not just its potential to take market share in books and CDs, but in many retail categories. In fact, it wouldn't be a surprise to see Amazon.com make a big push into toys within the next year.
But BarnesandNoble.com says it will pretty much stick to books and "complementary information products." If Barnes and Noble's strategy never expands, then the maximum price the market will pay for the company may have already been reached.
A major part of Amazon.com's strategy is to continually increase its customer base and service them amazingly well. If BarnesandNoble.com follows a more limited strategy, it's not the same animal as Amazon.com.