TABLE OF CONTENTS
Investing is like many other aspects of life: the more thoroughly you prepare, and the more you work at it, the better you will do. The framework that you take away from this book will help you gain that experience much faster.
PART 1 BASICS: STARTING A BUSINESS, FINANCIAL STATEMENTS, AND COMMON STOCK
CHAPTER 1 STARTING A BUSINESS
A company is founded and basic financial statements and terms are introduced.
CHAPTER 2 OWNERSHIP AND STOCK
The company raises new equity money from private investors. The company incorporates and formalizes its ownership equity accounts.
CHAPTER 3 BORROWING MONEY AS THE COMPANY GROWS
The basic terminology of borrowing is explained, and some new terms are added to the balance sheet.
CHAPTER 4 RATIOS INVESTORS WATCH
Twenty-one commonly watched ratios are discussed, including profitability ratios, financial condition ratios and liquidity ratios. The importance of earnings-per-share is introduced.
CHAPTER 5 GOING PUBLIC – PRIMARY AND SECONDARY OFFERINGS
What it means to “go public” and why a company does so. The difference between a primary offering, a secondary offering, and an initial public offering is covered.
CHAPTER 6 EARNINGS DILUTION – JMC GOES PUBLIC
Earnings dilution, a key concept, is presented, and we also look at stock splits and the process of going public.
PART 2 SECURITIES OTHER THAN COMMON STOCK: BONDS, PREFERRED STOCK, AND HYBRID SECURITIES
CHAPTER 7 FINANCING GROWTH: SELLING NEW STOCK VERSUS SELLING NEW BONDS
We see how a company wishing to raise new money chooses between a stock offering, which may dilute earnings, and a bond offering, which will lower earnings as a result of the higher interest expense.
CHAPTER 8 BONDS
A bond is basically a loan. There are differences between bonds that affect their value to investors. The difference between coupon yield, current yield, and yield to maturity is presented. An understanding of bond priorities and ratings, and other features, will help investors distinguish among bonds as investments.
CHAPTER 9 WHY BONDS GO UP AND DOWN
Bond prices and yields respond to changes in prevailing interest rates and changes in issuer creditworthiness. We look at the U.S. Treasury yield curve, and other yield curves. The spread between yield curves will help determine when bond prices are high or low.
CHAPTER 10 BONDS: ADVANCED TOPICS
Additional bond features, such as “call” and “refunding” provisions, and covenants will provide a more complete understanding of bonds. Zero coupon bonds and resets are explained.
CHAPTER 11 CONVERTIBLE BONDS
Convertible bonds are like other bonds except they can also be converted into common stock. Here we learn how that conversion feature gives these bonds very different investment characteristics as well as impacting the earnings share reported on the income statement. Basic and diluted earnings are explained.
CHAPTER 12 PREFERRED STOCK
We see how a preferred stock’s fixed dividend and other characteristics make it quite different from common stock.
CHAPTER 13 CONVERTIBLE PREFERRED STOCK AND HYBRID PREFERRED SECURITIES
We learn how to convert a convertible preferred stock, and see its impact on earnings-per-share. Hybrid, or trust preferred securities, are introduced. They have features of both preferred stock and bonds.
PART 3 COMPANY ASSETS AND CASH FLOW
CHAPTER 14 FIXED ASSETS, DEPRECIATION, AND CASH FLOW
How companies account for the wearing out of their assets directly impacts the earnings they report to stockholders. It also allows for an understanding of the important concept of cash flow.
CHAPTER 15 COST VERSUS EXPENSE, CAPITALIZING ASSETS, AND WRITE-OFFS
A lot of accounting and investment terminology presented in this chapter will increase the reader’s sophistication and ability to participate in more advanced investment discussions.
CHAPTER 16 CASH FLOW
Cash flow is not the same as earnings. Understanding the difference will help investors interpret financial statements, and therefore improve their ability to identify both attractive stocks and companies that may be headed for trouble. Looking at a company’s sources and uses of cash flow can reveal a very different picture than just looking at earnings.
CHAPTER 17 INVENTORY ACCOUNTING – IMPACT ON COMPANY EARNINGS
The cost of a company’s inventory is not as easily determined as one might guess. The LIFO or FIFO assumptions that a company makes in costing its inventory will impact its earnings in the current year and in the future. We will see when inventory write downs may indicate trouble and when they may present a buying opportunity.
PART 4 WHY STOCKS GO UP AND DOWN
CHAPTER 18 PRICE I EARNINGS AND OTHER EVALUATION RATIOS: WHEN IS A STOCK HIGH OR LOW?
The price/earnings ratio is the primary measure that investors use in valuing stocks. We look at the price/earnings ratio in a number of ways, and also look at other valuation ratios: price/cash-flow, price/sales, price/earnings power, and enterprise value/EBITDA. The material in this chapter has helped clear up a lot of our students’ misunderstandings about stock prices.
CHAPTER 19 WHY STOCKS GO UP AND DOWN
In the final chapter, we apply the concepts covered throughout the book to the stock of Abbott Labs. This real world example will help readers appreciate the nuances of applying the analytical framework to a publicly traded company.
APPENDIX: SHORT SELLING