A better gauge of a company's health

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Many investors think that we should pursue the wealth of those who profit, in fact it's common but it is also very easy to passive hands and feet. The current financial crisis - continues to make the world falling into a deep quagmire, let us know some companies have been rotting from the inside though, and still be able to form a very good profit growth.

If you want to chase the real wealth, concentrate on the company's balance sheet, which is only to determine whether the company the best health information.

Now, many companies are still due to debt and financial leverage from the result of half-dead state of recovery, when a company from the intensive care unit transfer into the general rehabilitation wards when the study of its balance sheet to find the cheap stocks that are improving.

Ford under the microscope

Ford put under a microscope

Let us take the Ford, for example, look at how its balance sheet to determine whether a company is worth to buy its stock.

November 3, Ford announced that third-quarter profit of 1 billion U.S. dollars, which boarded the nation's commercial version of the media headlines. Earnings per share of 29 cents, while in the third quarter of 2008 (last year) they are a loss of 161 million U.S. dollars, seven cents per share.

Revenue from other members of the same surprise. For example, Ford's North American division has made a profit for the first time since they opened - just like a chair on the Titanic - at the time of the four and a half inside. In short, Ford told Wall Street analysts, the company will be stable in 2011 profits.

It is time to buy Ford shares, right?

No, unless you looked at Ford's balance sheet.

From the financial report, you can see that Ford has been little progress and how many gaps.

Because Ford is the only Big Three U.S. auto industry is not bankrupt, the company is still saddled with all of the debt burden. That is a very heavy burden.

According to Barclay's Capital's report, in 2001, Ford's debt will reach 38 billion U.S. dollars. The General Motors through the bankruptcy get rid of a huge debt burden of only 223 billion of debt.

Ford announced a new financial health, rather than submerged in the sea of red ink, Ford will be able to many of his debt to raise capital. Ford announced that it will increase three billion U.S. dollars to pay the debt. These cash in 10 billion from ordinary shares, 200 million convertible warrants to the word of priority. These warrants can be replaced in 2016, common stock or cash.

A thumbs-up from creditors

Creditors praised

Ford how to use the 3 billion? It will be used to repay its 25% of the revolving credit facility. This will allow Ford to persuade others to give 6 billion of the borrower to its revolving credit facility, so that the debt maturity from 2011, the 12-month delay to 2013 in November. In other words, Ford would have needed to be repaid within two years, 6.0 billion of debt has pushed back two years. (Ford is negotiating the extension of its revolving line of credit remaining.)

Creditor gets what? 1% increase in lending rates, increased remuneration, in advance pre-paid deposit, as well as Ford could cut 25% of the maximum credit limit.

All this means more than individual investors who have the opportunity to investigate a large number of borrowers, given Ford's balance sheet in recognition. They believe Ford is returning to pick up, so give Ford an opportunity to strengthen its balance sheet. In this way, will allow Ford's anti-risk capability has been greatly enhanced, if the auto industry sales, and not as widespread as expected better.

Shares face dilution

Nominal dilution of the stock

I am more inclined to the balance sheet such improvements as evidence of business improvement, rather than listening to the so-called declaration of a quarterly earnings increase.

However, this analysis of the balance sheet does not allow me to completely believe it should buy Ford shares. The company will be issuing 132 million new shares to raise 1 billion U.S. dollars. After the issuance of the current investors in the hands of shares in the Company will be reduced by 4.1 percentage points. In the event transactions, this level of ownership will be equally at home to pass on to the next. Before the issuance of additional, according to Standard & Poor's forecast, in 2010, existing investors will have a 20 cents per share earnings. After the issuance, earnings per share only 19 cents.

How important is the difference between a penny? Of course not very important. Does not prevent investors now to buy a share price of 7.58 U.S. dollars of stock.

But if you understand that in 2009, 100 million shares of additional issue will not be the first time, you will know how significant the difference. Even though Ford used this all of the 3 billion U.S. dollars to reduce debt levels, it still has 35 billion U.S. dollars of debt to deal with.

Therefore, those who have been Ford's balance sheet to improve the encouragement to buy stock, need to ask themselves this: at Ford's balance sheet has become fully healthy before the need to return several times to see their equity diluted 4% or more.


A different look Down Under

The following examples look at different

Let us Ford's balance sheet with another company to do a completely different comparison - Lynas, one has the world's most valuable mineral deposits of rare earth mining companies in Australia. (See my September 11 column, to understand why you need to have a rare-earth mining companies.)



This is a balance sheet from the near-death recovery company. In February, Lynas because they can not meet the terms of the undertaking to abolish the 95 million U.S. dollars of the company's convertible bonds. This has resulted in 105 million of senior notes. It also delayed the operation of rare-earth mine, and indeed the ongoing exploration drilling has been completed and reserves. Then came an investor - China Nonferrous, and its plans to spend 277 million Australian dollars (depending on Thursday's exchange rate, combined 252 million U.S. dollars), to obtain more than 50% of the lynas of the shares. This transaction will allow Lynas to resume operations, but will let the Chinese have more of RE in the global supply of power. In fact, China has taken control of 95% to 97% of the world's rare earth production. In the end, Australia's managers refused to let the Chinese-owned trading proposal. (On the details of the transaction the story, see my September 25 post, the website is Jubakicks.com)

Lynas doubles its shares outstanding

Issuance of shares to double the number of Lynas



Benefited from the global financial markets pick up, as well as the March 9 rally since the stock market, Lynas can be obtained from the additional 408 million. When so, this dilution of existing shareholders is huge: the number of shares in June 2009 from 655 billion to 1.3 billion. All the November 3 issue additional investors to buy shares before the now only half its original corporate interests. But those in the June 30 investors who own the company a small part - in cash into its concentrator that can transport its rare earth products, not just for storage. Also completed the original material in Malaysia, the primary facility to be used for subsequent processing.