Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 237

a high debt ratio many creditors would end up with losses (as the company's book value will not be adequate to repay them), let alone the shareholders who are at the bottom of the collection list. As an example, Microsoft, which has no debt, has a debt ratio of zero, while Sears has a debt ratio of about 2.1 (which could be considered high). You may notice many startups with no earnings to show having a debt ratio of zero. Where does their money come from? Yes, the IPO. Remember that the capital raised by selling stocks is not debt. It never has to be paid back.

Management Effectiveness

This category indicates how well the company is using its money to produce results (read, earnings). It may not necessarily be useful in directly valuing a stock, but it is a good tool in measuring the company's performance, which influences the stock.

Return On Assets - This value measures the company's effectiveness in producing profits using all of its assets (cash, equity, debt, etc.). Return on assets is calculated by dividing the company's annual earnings by its total assets and is expressed in percentage terms. This is a popular measure of a company's profitability, and the higher the number the better. By some accounts, if this value exceeds the interest rate paid by the company to its debtors, the company is doing a good job. If the company has negative earnings, this value would also be negative and perhaps an insignificant measurement tool. CSX (a freight company), for example, has a return on assets of 0.9% (pretty weak), while Microsoft's return on assets is 25% (very healthy).

Return On Equity - This value is calculated by dividing the company's annual earnings by its shareholder's equity (book value) and is expressed in percentage term. This value represents how well the


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