|
|
Enron Mail |
_________________________________________________________________
I N V E S T I N G B A S I C S Wednesday, November 1, 2000 benjamin.rogers@enron.com _________________________________________________________________ REGISTER TO BECOME A FOOL -- GET FREE STUFF! http://www.fool.com/m.asp?i=3D178196 _________________________________________________________________ Sponsored By: NDB Apply Now and get $75 in Free Trade Commissions when you open your account with National Discount Brokers / ndb.com. Another way we take you under our wing. http://www.lnksrv.com/m.asp?i=3D178197 ASK THE FOOL -- Q. I'm interested in REITs (Real Estate Investment Trusts), but I don't understand what "FFO" refers to. Can you explain? -- A. REITs look and act much like ordinary stocks, but peek under their hoods and you'll see a different kind of company. REITs typically own many properties, such as offices, hotels or apartments. With most companies, net income is a useful number to evaluate, reflecting the profits left over from sales after all expenses have been subtracted. With REITs, though, net income isn't as meaningful. According to accounting rules, the value of REIT properties is decreased over time, with depreciation charged against net income, reducing it. In reality, however, these properties are probably not falling in value and may even be appreciating. So a REIT's net income tends to understate its health. This is why, with REITs, you should look at the "funds from operation," or FFO, instead. They ignore the effect of depreciation and other non-cash charges to help you see a REIT's true performance. -- Q. I often see S&P futures referred to on CNBC. Can you explain what futures are and why they're important? -- A. Futures are typically for commodities like lumber, soybeans and orange juice. They represent contracts between two parties to buy or sell a certain amount for a specified price at a set future date. (Fail to pay attention, and you risk having to take delivery of truckloads of pork bellies!) With S&P 500 futures, each day the party who bet wrong is obligated to pony up cash based on the price of the S&P 500. Futures are bought by some investors to protect themselves against unfavorable price swings or by speculators betting on where the market is going. They can be very risky. Un-Foolish short-term investors pay a lot of attention to S&P futures, as they can indicate the market's likely moves before trading begins for the day. We don't fret about futures, though, remembering that for most of this century, the S&P 500 has advanced about 11 percent per year, on average. Got some questions of your own for the Fool? Head to our Help area or post your question on the Ask a Foolish Question discussion board. http://www.fool.com/m.asp?i=3D178198 http://www.fool.com/m.asp?i=3D178199 _________________________________________________________________ INVESTING BASICS - DEBATING DEBT Many investors think that debt on a company's balance sheet is a red flag. In truth, though, debt can be both bad and good. First, the bad. If a company is saddled with a lot of debt, it's locked into interest payments that it must make. If it doesn't have the cash to cover these at any point, it's in deep doodoo. Many individuals can probably relate to this, having experienced the dark side of debt when racking up charges on credit cards. Now, the good. Consider that most people would never be able to buy their homes without debt. Without car and school loans, many of us would probably be driving used cars and taking correspondence courses we found on matchbook covers. Debt can be a boon for businesses, too. Many great companies, such as Federal Express and the Walt Disney Co., came to life because of early loans to their founders. Established companies can make good use of debt, as well, borrowing to expand operations and grow business. Interest payments also decrease a company's taxable income, as they're deductible. Investors willing to consider companies with debt need to evaluate whether the debt taken on is manageable and whether the capital raised and invested is earning more than it costs. Perhaps you're worried about the debt load of Fingernail-on-Blackboard Car Alarm Co. (ticker: AIEEE). Glance at the notes in the annual report and you may find that the effective interest rate for its debt is just 5 percent. If AIEEE is putting the borrowed funds to work earning say, 8 percent, then things aren't so bad. When companies need money, they typically have two main choices: They can issue more stock or debt. Issuing stock can dilute the value of existing shares. Issuing debt can sometimes be more efficient, as its after-tax cost can be much cheaper than equity. All things being equal, though, we prefer to see little debt on a balance sheet. Companies that can grow without using debt or issuing extra stock are in a more powerful position than other firms. Still, you needn't balk at the first sight of debt. Just evaluate it carefully. _________________________________________________________________ IN THE SPOTLIGHT -- Fool Phil Weiss explained in greater detail about the good, bad, and ugly aspects of debt in two Rule Maker articles. Read part 1 and part 2. http://www.fool.com/m.asp?i=3D178200 http://www.fool.com/m.asp?i=3D178201 -- If you haven't checked out our Dueling Fools features, you should do so. Each week, Fool staffers debate the merits of a company or financial issue. Read the current and past duels at at Fool Duel central. http://www.fool.com/m.asp?i=3D178202 -- Don't neglect your retirement! Whether you're 25 or 75, there are some useful things you can learn about planning for or living in retirement. http://www.fool.com/m.asp?i=3D178203 _________________________________________________________________ A NOTE FROM THE AUTHOR=01( I hope you're finding this product useful. The content originally appeared as part of our nationally syndicated newspaper feature (which I also prepare). Consider giving your local editor a jingle and suggesting that they think about carrying the Fool. http://www.fool.com/m.asp?i=3D178204 Selena Maranjian http://www.fool.com/m.asp?i=3D178205 _________________________________________________________________ My Portfolio: http://www.fool.com/m.asp?i=3D178206 My Discussion Boards: http://www.fool.com/m.asp?i=3D178207 My Fool: http://www.fool.com/m.asp?i=3D178208 Fool.com Home: http://www.fool.com/m.asp?i=3D178209 My E-Mail Settings: http://www.fool.com/m.asp?i=3D178210 Sponsored By: NDB Apply Now and get $75 in Free Trade Commissions when you open your account with National Discount Brokers / ndb.com. Another way we take you under our wing. http://www.lnksrv.com/m.asp?i=3D178211 LAST DAY TO ENROLL! Sign up today for our Roadmap to Retirement online seminar. http://www.fool.com/m.asp?i=3D178212 BECOME A FOOL! Get a FREE Investing Guide and more... http://www.fool.com/m.asp?i=3D178213 FOOL DIRECT E-MAIL SERVICES Need to change your address or unsubscribe? You can also temporarily suspend mail delivery. Click here: http://www.fool.com/community/freemail/freemaillogin.asp?email=3Dbenjamin.r= ogers @enron.com Have ideas about how we can improve the Fool Direct or new e-mail products you'd like to see? Try our discussion board: http://www.fool.com/m.asp?i=3D178214 ____________________________________________________ © Copyright 2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. MsgId:=20 msg-6883-2000-11-01_12-06-21-4358159_5_Plain_MessageAddress.msg-12:15:10(11= -01 -2000) X-Version: mailer-sender-master,v 1.84 X-Version: mailer-sender-daemon,v 1.84 Message-Recipient: benjamin.rogers@enron.com
|