Name That Company

I was founded in 1866 when a pharmacist tried to develop an economical alternative to breast milk for mothers who couldn’t nurse their babies. Today I’m Switzerland’s largest industrial company and the world’s largest food company, employing nearly a quarter of a million people. My brands are available in almost every nation, and include Taster’s Choice, Carnation, Libby’s, PowerBar, Maggi, Buitoni, Stouffer’s, Kit Kat, Smarties, After Eight, Baby Ruth, Butterfinger, Friskies, Fancy Feast, Alpo and Mighty Dog. I also hold a major interest in L’Orl. Sales of my instant coffee more than doubled during World War II. Who am I? (Answer: Nestle)

Know the answer? Send it to us with Foolish Trivia on the top and you’ll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

Scrutinize the numbers

If recent events on Wall Street have taught us anything, it’s to not take at face value everything that companies tell us. Here are some examples of how numbers are not always what they seem.

Many companies will report “record” earnings. This isn’t always as impressive as it sounds. Imagine that Librarian Supply Co. (ticker: SHHHH) earns $2 per share in 1999. If it earns $2.01 in 2000, $2.02 in 2001 and $2.03 in 2002, each of those, technically, will be “record” earnings, but they’ll represent meager growth. When studying a company, you need to determine its growth rates for revenues and earnings.

Imagine Amalgamated Chorus Girls Inc. (ticker: KICKS), which reports that its revenues advanced 200 percent over the past year. That’s more telling than “record growth” and would intrigue most investors. But check to see what the actual revenue numbers are. Perhaps KICKS has been struggling, and took in only $300,000 in 2001. Two hundred percent growth would put it at $900,000 in 2002. That’s still mighty tiny. It’s important to consider companies in the proper context. A behemoth such as Wal-Mart can’t double earnings as quickly as a small upstart. It’s usually easier to double $5 million than $50 billion. (Wal-Mart rakes in more than $200 billion annually!) As companies grow larger, their growth rates tend to slow down.

Another potential danger is the “annualized” growth rate. When a company (or mutual fund) annualizes its total return over a number of years, it’s telling you how much it roughly earned, on average, per year. This can be handy, but check what period of growth is covered. For example, if Holy Karaoke Inc. (ticker: HYMNS) increased its earnings from $0.12 per share in one year to $0.37 five years later, its annualized growth is about 25 percent. If Bright Idea Lightbulb Co. (ticker: UREKA) doubled its earnings in three months, its annualized rate would be more like 1,500 percent a very unsustainable rate. Annualizing a short period’s returns can distort the numbers.

A close look at numbers can pay off.

Who’s doing all the buying?

With all the selling going on in the stock market, who is buying? J. Kidwell, Santa Rosa, Calif.

For every seller, there’s a buyer. The stock market is like an auction, where shares trade at prices that buyers are willing to pay and sellers are willing to take.

That’s why, when it’s revealed that Dodgeball Supply Co. (ticker: WHAPP) engaged in fraudulent accounting, buyers will immediately decide that its shares are worth a lot less and sellers will only be able to unload at lower prices. You might want nothing more to do with Dodgeball Supply anymore, but there’s always someone who thinks it’s a bargain at current low levels. (“Specialists” and “market makers” serve as middlemen, through whom shares are bought and sold.)

My mother is invested in certificates of deposit that pay around 2 percent per year. She wants to invest in nothing else and thinks rates will rise. What do you think? P.B., via e-mail

Mothers are usually right. Interest rates will rise, eventually. One approach to consider is “laddering.” CDs with longer maturities are carrying higher interest rates right now. Depending on your needs and preferences, you might, for example, put a third of your money in six-month CDs, a third in two-year CDs and a third in five-year CDs. Then, as each matures, invest in new three-year CDs at the current rates, which may well be higher. That way you’re not locking yourself into low rates for a long time.

Grab your 15 minutes of fame and ask a financial question or share your thoughts with Fool co-founders David and Tom Gardner on The Motley Fool Radio Show on National Public Radio. Call anytime toll-free at (866) NPR-FOOL.

Ker-flop

In the early ’80s, one of my Marine reserve squadron mates was a salesman for IBM. While regaling us with tales of his sales prowess, he mentioned that he had just made a major sale to a company. The firm was about to launch a new company and product called Nimslo, centered around a new camera that took 3-D pictures using normal film. Nimslo was going public, and he suggested that this would be a profitable investment. I purchased about $300 worth of stock. My broker warned me that this was highly speculative and even made me sign something to that effect. The stock quickly tanked, and I learned years later that it was worthless. Tom Yeoman, Columbia, S.C.

The Fool Responds: Ouch. It can be rewarding to keep abreast of exciting new companies, but don’t invest in them until you’re sure that they have a sound strategy and the wherewithal to succeed. Better still, wait until they have a solid track record. With most great companies, you needn’t have invested in them right at the beginning in order to do very well.