What to Analyze on the Statement of Cash Flow

When analyzing the company’s statement of cash flow, there are three important parts to consider—operations, investing and financing.  Each piece gives you a separate piece of the company’s corporate finance strategy and analyzing all of them together helps you determine if the company is financially strong and a company you would like to invest in.

The operations piece of the cash flow report tells you how much money the company can generate internally.  The investing piece shows you how much the company is spending for acquisitions, investments, property and equipment.  It also shows you how much the company is bringing in through their investments.  Finally, the financing piece shows how much the company is spending to service their debts as well as the debts they have recently paid off.

Another important piece to consider is how often the company is issuing cash dividends as it takes cash to do so.

When you consider net income as well as the company’s statement of cash flow, you can get a fuller picture of a company’s stability and financial success, which in turn will help you determine if you want to invest with them.

Steps for an Investing Novice

Of course, a new investor may want to think twice about investing in individual companies without guidance.  A better strategy for a first time investor may be to invest in mutual funds so the risk is spread out over several companies.  As you invest more and become more comfortable with investing, you can begin to invest small amounts into individual companies that you research careful.  As your confidence and, hopefully, investments grow, you can begin to invest larger sums.

Likewise, you can hire a financial planner, but it is still in your best interest to do your research and feel comfortable with the company you are investing in because it is your money.  If you lose that money due to a bad investment, you will suffer the financial consequences, not your financial planner.  When investing, no one cares about your money as much as you do, so invest wisely after careful planning and research.

Post by Melissa

If completed correctly, renovations can optimise the potential of your home or investment property.

Rest assured there are a variety of loans available that can enable home owners to renovate their existing property.

If, for example, you are simply planning to freshen up your property with a new coat of paint, fitting of fixtures, you may wish to consider a personal loan. Usually the repayment period is between five to seven years. This type of loan often includes no fees and there is no security required, meaning your home and assets are not at risk.

Keep in mind that the interest rate on a personal loan is often higher than the interest rate on the average mortgage. So, perhaps consider a ‘top up’ of your mortgage (if you have one) instead but remember the extra money loaned will be stretched out over the entirety of your mortgage term. In this case it’s best to make extra payments on your mortgage as if you were paying off the personal loan as a separate debt alongside your usual mortgage repayments.

If your renovations are more complex and involve structural changes such as adding a new bedroom or bedroom, and Council approval is required, a construction loan may be needed.

A construction loan finances the construction of part or all of a dwelling, and the funds are drawn down over time as the structure is built, rather than in one lump sum. These draw downs are sometimes referred to as ‘progress payments’, and the lender usually sets a time limit on the draw down period.

Alternatively, you may want to take out a second loan for the renovations. Your lender will make progress payments and once the loan is fully drawn down, you then have an option to consolidate your loans into one product.

Whether you are planning to get your hands dirty or hire someone to do it for you and are unsure as to how you can afford it, then consider using your mortgage facility. A reputable mortgage broker such as this mortgage broker melbourne can discuss the nuts and bolts of your current loan and the options available to you to help you complete your renovation.

Borrowing a little extra now to complete some cost-effective renovations is a great way to add value to your property in the long run.

Managing finances is not an easy task; however, basic personal finance simply means ensuring that your earnings are greater than what you are spending, as well as saving enough to make a living when you no longer work full-time.

This might sound simple enough, but there are many things to consider in a financial package: insurance, investments, credit cards, mortgages, and more. And since the global economic recession has been tough to many of us, an ever-increasing number of people seek the guidance of an outside advisor as far as personal finance is concerned.

However, getting paid assistance might not be too enlightening if you haven’t got a clear picture of what to expect, not to mention it is expensive. So, before starting to pay for these services, you will certainly want to spend some time and effort trying to understand some basic issues, trying to get a better understanding of your inclinations and financial practices, as well as trying to figure out how to control them.

Start by finding your own answers

The answers to these questions are often more difficult to face than to find. Gaining greater control over your personal finances primarily means analyzing both your income and your personal daily expenses. As foreboding as that may seem, bank statements are always good tools when it comes to analyzing your cash flow and attempting to maximize it.

Another good suggestion would be to try and use a finance website, such as Mint.com (without charge) or Quicken (quite inexpensive) to get a better image of your finances without having to go through all that paperwork. Transactions, such as charges to your card, are traced automatically and can be observed in a straightforward way. You have graphs and charts that are easy to read, so expenditures on dinners or shopping over the past few months can be checked with no difficulty. It takes a stark look at these numbers to realize how much we spend frivolously. These web applications also have utilities for paying bills online and spreading your payments so as to be more in control of what you receive and what you give.

If you want another good way to track your spending, credit cards are one. Companies that offer credit cards issue exhaustive statements, which organize your expenditures into categories and issue quarterly and/or yearly abstracts regarding the destinations of your spending. Perhaps the best example is American Express, which offers various online tools that are intended precisely to give you a detailed overview of your habits, thus giving you more power to control them.

And, which is even more, you will always be able to maximize the amounts that are returned to you in rewards, by knowing where you spend the most. For example, if it is in restaurants that you spend the most, you can get as main credit card a Costco Amex card or a Citi Forward card and you will get your money back on restaurant expenditures. Similarly, if your main expenditure is gasoline, the more advantageous choice would be a gas credit card, such as the PenFed Platinum Cashback, which would bring you 5% rebates.

Knowing yourself is definitely worth the effort. Getting to know yourself in this manner will help you understand what steps you need to take in order to get rid of the expenses you don’t need to make and to get the best rebates and discounts on the ones you need to make.

One last check before hiring an adviser

Even if you have gotten some clarification on the ways how and the places where you tend to spend your money, changes are not always easy to make. Understanding your inclinations means both knowing your weak points and reaching out for help when necessary.

There are many books that you can choose from to help you break your habits, such as I Will Teach You To Be Rich, by Ramit Sethi. Then, there are also the so-called “advisors”, like Suze Orman or Dave Ramsey. They all have valued and verified plans for reducing debt, controlling expenditure as well as for starting saving. Even more, you would be able to find a community of people who resemble you that you can share with and discuss experiences with, and who would give you the strength to carry on. A financial advisor would have the same role, but in this case you are the one who’s in control and not paying for any expensive services.

You might be one of those few individuals that’ lucky enough to work for a company that has a 401k plan. These companies will often match your monthly contribution. How this works is the company in question will agree upon a predetermined percentage and put that towards your plan. This comes out of your paycheck and whatever agreed upon percentage will go towards a fund that is put back for your investment. This is usually a retirement fund. Your work will then match up to that percentage, which is most commonly around six percent. Now, you can put in whatever amount you want but the company won’t go past that percentage. It’s a great way to make free money and shore up your funds for later on in life.

An IRA is a long-term investment, like a 401k, that doesn’t take a ton of money to start up. IRA stands for Individual Retirement Account and it’s pretty much a savings account that provides investors with tax breaks and other incentives. It’s a savings account in which your money is invested in stocks, bonds, mutual funds, and other assets. As I’ve learned, it’s an ideal way to put away cash. Though IRA’s aren’t exactly an investment, they are a good way to put back money for your later years and shore up your holdings.

People have always found it lucrative to invest their money in the stock market. Using a broker is always advised since they’re able to mange your investments with a certain level of understand beyond that of the common investor. It depends but brokers can really cut into your profits with high commission rates. You can do it yourself but if you’re a novice it’s ill advised to venture into an arena as fickle as the stock market with out the proper knowledge or experience. If you feel that this option is right for you then I recommended you start small with investments like penny stocks. These are stocks that trade at 5 dollars or under.

Resources like TimothySykes.com are helpful to investors who don’t really know the penny stock game. Often bought cheaply and quickly, these stocks hold a certain level of risk so it’s advisable that you don’t sink a lot of money into them. They’re great short-term investments for people who want to get a feel for the stock market and don’t want to wait it out with long-term stocks. The cost is so low that many like to use these, potentially, high yield investments.

Often times there are investment opportunities that require an initial minimum investment that can cost you several thousand dollars. Don’t let this stop you because there are too many options, like the ones listed above, which make it affordable for anyone. You don’t have to spend thousands in order to start saving.

Practice does make perfect in this world, if perfect only means being prepared. Every expert in the field swears by his forex demo training regimen, leading to countless hours to refine his trading style. A disciplined step-by-step trading plan is also a must, and should incorporate prudent risk and money management techniques. However, at the end of the day, if technical analysis reminds you too much of those math classes you hated in high school, you might want to consider another investment medium. Forex trading demands dexterous charting skills and the mental acuity to think and react to visual signals.

Technical analysis comes in a variety of shapes and sizes. Every trader’s forex trading software comes equipped with the best tools available, many of which are never used due to lack of trying. At the minimum, the following areas of study need to be mastered and enhanced over time:

• Pattern Recognition: From lowly candlesticks to a “head and shoulders” formation, a trader must educate himself as to the many price behavior formations that exist and the ramifications of each. Traders the world over look for these shapes, and if the expected result is a breakout or reversal, then you must be aware before it happens. Critics suggest that the results of these forms are self-fulfilling prophecies created by the mass consensus of trader psychology, but the cause does not matter. Learn to recognize and anticipate, the trait of a successful trader
• Technical Indicators: There is a multitude to choose from, but there is no “Holy Grail” that will transform you into a trading aficionado, so do not waste your time searching for it. Focus on two or three and develop a wealth of experience learning to interpret the nuances of each messaging system. Popular oscillators for forex trading are Slow Stochastics and the Relative Strength Index, and the Moving Average Convergence-Divergence is often used to confirm the signals from the former indicators. These tools are never perfect, but a 70% consistency rating can produce results;
• Support and Resistance: In many cases, skills in this area flow from the proceeding two areas. Wave analysis incorporates recognition intuitiveness with analytical skills to predict future price behavior and where entry and exit points may potentially be beneficial. It remains the responsibility of the trader to use and interpret software designed for this purpose. Using the “Fibs” can increase your effectiveness, but dexterity is required.

Forex trading is difficult. No one ever suggested that it was easy. High risk and high stress are the norms. There are many skills that must be developed and then practiced for hours to prepare you for real time trading with real capital on the line. Losing trades outnumber winning trades more often than not, such that losses must be minimized quickly, and winners must be allowed to run as long as they can within reason.

Technical analysis is your basis for making timely position decisions. Proficiency is a must.

The following is a guest post by writers at ForexTraders.com

When it comes to investment advice (but not cheap broadband advice) I’ll listen to almost anything that Warren Buffet has to say. And here’s what he has to say about this book:

by far the best book about investing ever written.

So if Warren Buffett gives such a raving review of this book, then I figure that there must be something useful to this book.

Here are some of the topics discussed in the book:

• the difference between a defensive and enterprising investor (most of us would probably fall in the former category)
• stock selection criteria for both the defensive and enterprising investor (getting down to the nitty gritty!)
• how to deal with the inevitable stock market fluctuations (I find this especially relevant in light of the recent market conditions)
• inflation and attempts to hedge against it (a real threat to the purchasing power of our money)
• pros and cons of the different types of mutual funds
• the margin of safety concept of investment

I’ve read this book a few times now, and still can’t say that I have a full grasp of the material. This is one of those books that you’ll come back to over and over again in your lifetime. I’d suggest reading it once, applying some of the things you’ve learned, then reading it again and repeating the process. Since most of us are investing for our future, I think it’s worthwhile to try to master some of the principles in this classic book.

On one hand, home ownership is a big commitment that can be very expensive. On the other hand, ownership is also an investment that can be less expensive than renting over the long term. So how do you decide?

Here are the advantages of each.

Advantages Of Renting

Greater Flexibility

Depending on your lease, you’re not tied to your residence for more than a year or two.

But when you buy a home, you’ll first need to sell it or find a tenant before you can move.

Low Maintenance

When you rent, maintenance issues such as fixing a broken pipe or clogged drain is the landlord’s responsibility. He’ll not only get somebody to fix it, but he’ll also pay the bill.

When you buy a home, keeping everything in good repair comes out of your own wallet.

Move In Faster

Renters can move in soon after their application is approved.

Buyers need to find the right home, negotiate the offer, get financing, and transfer ownership of the property. All of this takes considerably more time.

Move In Cheaper

Renting usually doesn’t involve more than two months’ rent and a security deposit to move in.

On the other hand, buying a home not only involves a big down payment (at least 20% in most cases), but you also pay thousands of dollars in fees and costs associated with getting a mortgage. These include application, origination, and title insurance fees just to name a few.

Advantages Of Buying

Your Own Place

For most, the main reason we want to buy is so that we’ll have a place to call our very own. With home ownership, you’re no longer paying off the landlord’s mortgage. Having your name on the deed is a great feeling for most of us.

Build Equity

As you pay off your mortgage and as home values rise, you build equity in your home. You can think of equity as a savings account, cashing out if you sell your home and using the money as a down payment for another house. Or you can borrow from your equity through a home equity loan or a home equity line of credit.

Tax Breaks

Mortgage interest, property taxes, and closing costs are deductible from your federal income taxes. This is another big reason why home ownership is appealing for many.

Beat Inflation

We’ve talked about the easiest way to beat inflation before. But here’s another, more indirect way.

As the cost of living rises, rent increases along with it. But if you apply for a fixed-rate mortgage, your payments stay the same for as long as you live in the home. So the longer you live there, the greater this benefit becomes.

What other factors are there to consider? Do you currently rent or buy the home you live in?

First photo by faul; Second photo by Casey Serin

This post was included in the Carnival Of Personal Finance during the week of August 2, 2010. Check out the Ultimate Money Blog for a variety of great articles!

Now we’ll look at the other perspective – analyzing stocks as an enterprising investor. What makes an enterprising investor different?

According to Graham, the enterprising investor is willing “to devote time and care to the selection of securities that are both sound and more attractive than the average.” In other words, this person is willing to put in the extra effort necessary to obtain a better than average return on investment. So if this describes you, what criteria do you use to analyze stocks for your portfolio?

Here are the six criteria that Graham suggests you follow:

Low Price/Earnings Ratio

The first criteria he suggests is a lower price/earnings ratio. As opposed to the defensive investor, who is advised to filter out stocks with a P/E ratio greater than 15, the enterprising investor is even more restricted. Only stocks with a P/E ratio of 9 or less are suitable.

Good Financial Condition

While the defensive investor looks for companies whose current assets are at least twice their current liabilities, the enterprising investor can be more flexible. Companies only need to have current assets that are one and a half times greater than their current liabilities to be sufficient for the enterprising investor.

Furthermore, the amount of debt is permitted to be within 110% of net current assets.

Earnings Stability

Again, Graham was more lenient in this area compared to the defensive investor. For the enterprising investor, he only required positive earnings over the previous five years.

Growth In Earnings

Graham didn’t require a specific percentage increase in earnings, as he did for the defensive investor. Rather, he only required that the company’s earnings from the previous year be more than its earnings figure five years ago.

Some Current Dividend

Graham was the most accommodating with this set of criteria. He didn’t insist on consistent dividend payments over a certain time period, but only expected some amount of current dividends.

Moderate Price

This was the only other criteria in which Graham placed more restrictions for the enterprising investor. To be a worthy company, the stock’s price needed to be less than 120% of the company’s tangible book value.

Closing Thoughts

Using this different set of criteria, enterprising investors would expand their list of suitable stocks for further analysis. However, Graham reminds us that to be successful, the enterprising investor must have enough knowledge of stock values to treat his operations as a business.

Do you consider yourself an enterprising investor? What other criteria do you use to analyze stocks?

This post was included in the Carnival Of Money Stories  during the week of July 19, 2010. Check out The Financial Blogger’s blog for a variety of great articles!

In the book, Graham makes a distinction between a defensive investor and an enterprising investor. A defensive investor has two main goals:

1. Avoid serious losses, and
2. Have freedom from effort and the need to make frequent decisions.

Here are seven criteria that he suggests we follow to help us find a quality stock as a defensive investor.

Adequate Company Size

Since smaller companies are more vulnerable to market fluctuations, Graham thought they were inappropriate for the defensive investor. So when he first wrote the book in 1949, he suggested focusing on stocks of companies with at least $100 million in annual sales. If the company is a public utility, he lowered the requirement to $50 million in total assets.

Jason Zweig, who wrote commentary on an updated version of Graham’s book, advised screening out stocks with a total market value of less than $2 billion.

Strong Financial Condition

Financial condition is measured by the company’s current ratio – calculated by dividing current assets by current liabilities. Graham believed that if a company’s current assets were at least twice their current liabilities, the company would be strong enough to withstand hard times.

He also advised that long-term debt shouldn’t exceed net current assets (current assets minus current liabilities). Using these filters, the list of suitable companies would be narrowed down to those that were conservatively financed and had staying power.

Earnings Stability

To be considered a solid stock, Graham wanted the company to have had positive earnings in each of the previous ten years.

Earnings Growth

Earnings alone were not sufficient for Graham to consider a stock safe for the defensive investor. In addition, over the previous ten years, the company should have increased its earnings per share by a total of 33%.

A Consistent Record Of Dividends

Graham also insisted on uninterrupted dividend payments over the past 20 years. Though it’s no guarantee that the company will continue to do so indefinitely, it’s a sign in the positive direction.

Moderate Price/Earnings Ratio

The current price shouldn’t be more than 15 times greater than the average earnings over the past three years.

Moderate Price/Book Value Ratio

Similarly, the current price shouldn’t be more than one and a half times the book value.

But to allow for some flexibility, Graham suggests that the product of the price/earnings ratio and the price/book value ratio shouldn’t exceed 22.5.

Applying The Criteria

With this knowledge, there are many stock screeners available to help you analyze stocks. I like to use Yahoo’s Stock Screener. Though it doesn’t have the capability to filter stocks using all seven criteria specifically, most are available to point you in the right direction. From there, you can dig deeper by using the SEC’s EDGAR database to find a company’s annual reports.

Do you invest in individual stocks? If so, what criteria do you use to choose them? Do you use a particular stock screener?

The Rule of 72 is a great tool to use for this purpose.

This rule can estimate the time it takes to double your money when the interest rate on your investment is known. Additionally, it can estimate the interest rate needed to double your money if your time horizon is known.

How It Works

If you know the interest rate of an investment, the length of time it takes to double your money is calculated by simply dividing 72 by the interest rate. So if the interest rate is 6%, then 72 / 6 = 12. It’ll take you about 12 years to double your money at 6% interest.

One the other hand, if you know that you need to double your money in 9 years, divide 72 by 9 to get 8. You’d need about an 8% interest rate to double your money within this time.

How It Helps

The Rule of 72 is a very helpful tool if you just want a quick approximation. If you don’t have a calculator available, this is a great substitute.

[table id=3 /]

So let’s say you open up a Roth IRA with $5,000, and you expect to earn 12% interest a year. From the Rule of 72, it’ll take about 6 years to grow your money to $10,000.

Or maybe you’ve been contributing to your 401k and have $500,000 saved up. If you plan on retiring in 16 years with $1 million, you’ll need an average return of about 4.5% on your investments.

How It Doesn’t Help

Although the Rule of 72 is a useful tool, it still is only an approximation. As such, there are errors in it. Specifically, at extremely low or high interest rates, the error is quite sizable.

For instance, according to the Rule of 72, the time it would take to double $50,000 to $100,000 at the rate of 72% is 1 year (72 / 72 = 1). But if you calculate the actual return after 1 year, you would only receive $86,000. This is a $14,000 difference, or an error rate of 14%.

Conversely, if the interest rate was 1%, according to the rule of 72, it would take 72 years for $50,000 to double. Yet if you calculate the actual return after 72 years, you’d receive over $102,300, more than $2,300 than the expected amount. This results in an error rate of 2.4%.

Where It Works Best

Taking these errors into consideration, the Rule of 72 works best for interest rates between 7 and 10%. Within this range, the time it takes to double your money as calculated from the Rule of 72 is accurate within one month of the actual time frame.

[table id=4 /]

Outside of this range, the actual time period needed to double your money can vary by a year or more!

For example, if your investment is earning 2% interest, the Rule of 72 says that you’ll double your money in 36 years. But if you actually do the math, it’ll really take about 35 years, saving you almost 365 days of needing to wait for your money.

And if your investment is only earning 1%, the Rule of 72 says that you’ll double your money in 72 years. But after doing the math, it’ll actually take under 70 years, saving you over 2 years of needing to wait for your money.

That being said, if the interest rate is outside the range of 7 to 10%, it’s better to calculate the actual time needed to double your money, so that you get a more accurate answer.

So although the Rule of 72 isn’t 100% accurate, using it is an easy way to get a good estimate of when and how you’ll be able to double your money.

Would knowing how long it takes to double your money, or the rate of return needed to double your money make a difference in how you save and invest?

This article was included in the Carnival of Personal Finance during the week of June 14, 2010. Check out Pop Economics for a variety of great articles!