Commentary (Page 435)

As you look at company metrics, it is necessary to remember that a company will rarely be perfectly consistent. Company results will vary due to a variety of situations, some of which will be outside of company control. For instance, a general increase in the price of gasoline can affect many companies for the positive or the negative.

These market adjustments are extremely difficult for company managers to adapt to rapidly and may force them to grow too quickly, face unforeseen costs, or see a contraction in their core markets. Over the course of a few months, most companies will start to accommodate the new market situations and be back on track; however, that peak or dip may disrupt the metrics for any given quarter.

Because of these incidental disruptions in business, a Confident Investor will not spend too much time digging into a company’s quarterly releases. Instead, focus on the annual numbers. Quarterly statements are more for the sake of allowing you to understand if there has been some significant change in the company’s core business, as opposed to a short-term disruption.

It is vital to look at the changes from year to year and over time. These changes will indicate if the company takes advantage of market situations and weathers bad times well. You thus need to understand how to analyze growth over time and decide if it is acceptable.

The simplest method of averaging these values is to take the last 5 or 10 years of results and calculate the average. Unfortunately, this can give a slightly distorted picture of the current performance of the company. To understand, let’s look at the sales revenue of a fictional company: Acme Widgets, Inc. ACME has the following sales revenue (all numbers below are in millions of dollars).

You could gather the first two columns from a variety of sources. The third column is the revenue increase for that year compared to the immediately preceding year. Most third party sites do not provide this information, so you will need to calculate it.

To calculate the third column, simply take the year’s metric, subtract it from the previous year, and divide that amount by the previous year. In the case of 2001, subtract $200M from $150M, which is $50M. If you divide $50M by $150M, the result is a 33.3% increase. If you are a registered owner of my book, The Confident Investor, you can download a worksheet that will help you with this effort by going to http://www.Confident-Investor.com/analysis-worksheet. You will need to be a registered user to access this page but you can register easily and for free by following the instructions.

A casual look at the revenue of ACME shows that they are growing their revenue, but the growth rate has slowed down fairly rapidly. However, if you do the simple calculation as to what percent increase it would take to grow $150M to $600M in 10 years, you would calculate this to be 13.9% per year if compounded continuously. A 13.9% increase year-over-year is great; but that is not occurring in this instance. ACME has not been close to that number for a few years.

You could average the annual rates by adding them up and dividing by 9. This would result in 12.8%. This is not indicative of what you would think of a company that has grown less than 4% for the past few years.

You could also perform a linear regression analysis of the growth rate. Linear regression is a moderately advanced mathematical method of fitting a straight line to a data set. It is easy to compute the linear regression in today’s modern spreadsheets but very complicated to do on paper or in your head. I don’t suggest that investors use linear regression as there is an easier method.

You do not want to focus on the last two to four years, since another company might have exactly the opposite circumstances. Another company could have had relatively flat increases for many years and then just recently hit a significant expansion of business. While you want to reward the recent increase (as it will likely continue to the immediate future), you also want to take in account that the company was flat in the past.

To accomplish this, you need to weight the averages over the years. The more recent years are more influential than the middle years which, in turn, are more influential than the later years. To solve this problem, I created the Decennary Time Weighted Average (DTWA). To learn about DTWA, please read my book as it is well explained in its pages.   You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

Stock source from OpenClipart.

You might wonder if your credit cards could be used as an emergency fund.

Unfortunately, the answer is not clear cut, but it depends on your immediate situation. Basically, if you need a loan to cover your needs,  you should avoid the loan. If you don’t need a loan, then the loan is probably a decent thing.

Remember, your credit card is nothing more than a short-term loan for the balance of the month until your next bill. It is when you start to use short term credit card loans for a long time that you begin to have problems.

Too many people are already in credit card debt. This is likely costing them a great deal of income in interest. That interest is taking away from their ability to invest for the future.

If you carry a credit card balance,  adding an emergency charge will not help your situation in the long run.  You can do some substantial damage to your finances and your credit score.  You’ll probably end up paying interest on the charges, and you’re credit score will be hurt since you’re using more of your available credit.

On the other hand, if you have an emergency fund put away and you pay your credit card balances in full every month then using your credit card in an emergency is just a short-term bridge loan with no interest.  You can use the card then pay it off in full with your emergency savings.

Taking on additional debt to get you out of an emergency situation is not optimal. I understand if you must do it to get yourself out of a bad situation as that is the reason for the emergency fund. It is far better if you start today to build your emergency fund so that your credit card is simply a 30-day interest free loan.

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Editor’s Note: Dealing with current debt is a reality for many people. The challenge is to eliminate debt and at the same time grow your personal investment portfolio. Alanna does a great job of dealing with this issue.

In May of this year, the Federal Reserve Bank of New York reported that U.S. consumer debt totaled $11.23 trillion. If you are examining your personal financial situation to handle your share of this debt, you are taking the right step.

Managing your income properly requires an approach that is threefold, as you must look at what you owe today, how emergencies can impact your life and what you will be able to invest in to achieve retirement goals.

1. Handle high interest debt immediately. Credit card debt or loans with high interest rates have a tendency to drain even a solid income. Ignoring these debts or taking a haphazard approach to on-time payments can allow the problem to worsen, costing you more and more in interest and late fees. Start by making minimum payments on all the accounts you owe to put the accounts in good standing, which can eventually help your credit score improve.

There are two main schools of thought on which debts to pay off first, but there is a principle we can glean from both of them. One recommends paying off the account with the lowest balance first, which can seem easier and decreases the amount of open negative accounts. The other recommends paying off the account with the higher interest rate first.

Both of these strategies improve debt management as they approach debts by focusing on a specific problem and making an effort to pay more than the minimum payment on an account.

2. Put Together An Emergency Fund

Having savings for retirement is a goal to work toward after you have made a dent in your debt. Right now though, build up an emergency savings account of at least 3 months of after tax income. Your intention is to get out of debt and stay out of debt, so you need a cushion to soften any unexpected financial crisis.

Vehicles may suddenly require expensive maintenance. Costly medical issues can disrupt your life out of nowhere. You may encounter periods of unemployment or face increasing monthly rental payments. Being able to turn to an emergency fund in any of these situations can keep you from relying on credit or having to skip making your monthly loan payments.

3. Profit from Your Discretionary Income

Your discretionary income consists of the money you have after basic living expenses are subtracted based on the poverty line. What this means is taking your paycheck, subtracting regular necessary costs, then looking at what remains.

Once you have accomplished the goals of regularly paying on debts (including paying more on at least on accounts) and building an emergency account, you can pursue investing in any extra money from your discretionary income into savings.

You can begin with a traditional savings account that will earn a percentage on the money you deposit into it and also see what programs your job has to offer. There may be a 401(k) or other type of retirement account that will increase at a more rapid rate than your bank offers.

Research all of these options, while realistically considering how much you will be able to consistently set aside every paycheck.

Alanna Ritchie is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.

Nothing is more valuable for eliminating a company from consideration than your feelings about the company and/or it operations or products. You may choose to not own a company if it interferes with your personal, religious, or moral goals. Some people will have problems with companies such as:

• Alcohol manufacturers and distributors.
• Military and munitions manufacturers.
• Tobacco manufacturers and distributors.
• Companies that may have operations with low employment standards.
• Companies that support or do not support unionization.

Your personal feelings about a company should never be the primary reason to buy a stock. Just because you like a product or a service doesn’t mean you should invest your life’s savings in the company. Following those impulses can frequently destroy your portfolio.

It is reasonable, however, not to buy the stock of a company to which you have philosophical objections. Don’t make money from an operation that you do not think follows your personal convictions.