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Essential Checks under Your Stock Hood

15 may 2008 - Features - Editor

The months ahead could be like stock car racing. You have to drive a regular assembly-line model. The competition is fierce. Better use the pit stop to look under the hood.

Cheap credit is for the birds. It is a shady deal between the Fed and Wall Street. What can you do about it? Check the cash flow. Here are signs that should flash danger signs for any stock:

1. Total debt has crept closer to equity without new fixed assets close to commissioning.

2. The bank interest bill has crept closer to the gross profit line. Interest Coverage is down.

3. Working Capital has crept up. Receivable Turnover or Inventory Turnover has declined. Do not be fooled by a stable Current Ratio because suppliers may offer liberal credit in times of recession.

4. The Operating Margin has not kept pace with Gross Margin. This shows that management has increased costs to gain or even to keep customers.

Another sign of stock ill-health is that new forces have entered the equity arena on borrowed funds. This is most likely during an IPO. It is a recipe for a fire sale when a promoter has put an unduly optimistic face on business prospects.

Cheap and liberal credit hits Main Street hard. Lazy executives may not only jeopardize stocks, but do so without the SEC doing anything to warm ordinary investors. Prospects of declining demand and this Fed are recipes for disastrous cash mismanagement. Your stock market laps could stall and force you out of the investment race.

 


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