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I N V E S T I N G B A S I C S Wednesday, November 29,2000 benjamin.rogers@enron.com _________________________________________________________________ REGISTER TO BECOME A FOOL -- GET FREE STUFF! http://www.fool.com/m.asp?i=3D219248 _________________________________________________________________ Sponsored By: BUYandHOLD Hey Fool! Want to know the SECRET to long-term investing? Compounding and dollar-cost averaging! Start investing with as little as $20! Just $2.99 per order. http://www.lnksrv.com/m.asp?i=3D219249 ASK THE FOOL This weekly e-mail offers answers to questions that perplex most beginning and intermediate investors and throws in an investing-related lesson, as well. Enjoy! -- Q. What do you think of viaticals as investments? -- A. Viatical settlements have grown in popularity in recent years. But they're not without risk and they may make some people uncomfortable. Viatical settlements are when a terminally ill person sells his or her life insurance policy to someone else. Imagine John, stricken with a fatal form of cancer. He's 36 and is expected to live only three more years. If he needs cash to pay for medical bills or just to spend and enjoy, he might sell his life insurance policy to Jane. If it's set to pay $100,000 on his death, Jane might pay $66,000 for it. That way he gets a lot of cash now and Jane expects to get the $100,000 in about three years. At that rate, she'd be earning roughly a 15 percent annual return. There are many risks, though. John may hang on for seven years, significantly reducing Jane's return. Indeed, a cure for his cancer might be discovered. John may even outlive Jane! It's true that these settlements can provide a service for sick people, but they're not necessarily win-win. The middlemen arranging these settlements take cuts. Also, if John lives, he's without his life insurance policy and few insurers will want to insure him, as he's been so sick recently. We're uneasy about investing in something that has us rooting for speedy deaths and against medical breakthroughs. Also, there have been many instances of fraud with viaticals. -- Q. What does "shrinkage" mean in the business world? -- A. It refers to the loss of inventory that happens through usual ways, such as accidental breakage, theft, weather damage, etc. Got some questions of your own for the Fool? Head to our Help area or post your question on the Ask a Foolish Question discussion board. http://www.fool.com/m.asp?i=3D219250 http://www.fool.com/m.asp?i=3D219251 _________________________________________________________________ INVESTING BASICS - IN THE MARGINS If you're new to investing, you've probably stared at an income statement (sometimes called a statement of operations) and scratched your head, wondering what it's telling you. Let us help. First, understand that the income statement summarizes sales and profits over a period of time. It might cover three months or a year, for example. It will usually offer information for the year-ago period as well, so you can compare the two and spot trends. Here's a slightly dated but nevertheless interesting example. Let's look at Eskimo Pie Corp.'s income statement for fiscal year 1998. At the top, as with every income statement, you'll find net sales (sometimes called revenues). For Eskimo Pie, they're $63.5 million. From now on, as we work down the income statement, various costs will be subtracted from the revenues, leaving different levels of profit. The item you'll find just under revenues is "cost of goods sold" (abbreviated as COGS and sometimes called cost of sales), which represents the cost of producing the products or services sold. For Eskimo Pie it's $37.4 million. Subtract the COGS from revenues, and you'll get a gross profit of $26.1 million. To find the gross profit margin, simply divide the gross profit by revenues. $26.1 million divided by $63.5 million yields a gross margin of 41 percent. (Compare results with industry peers. For example, at a similar time, gross margin was 35 percent for Ben & Jerry's, which has a somewhat different business model.) Next, the remaining costs involved in operating the business, such as support staff salaries, utility bills and advertising expenses, are subtracted, leaving the operating profit. Eskimo Pie's operating profit is $1.8 million. Divide this by revenues, and you get a slim operating margin of 2.8 percent. This reveals the profitability of the company's principal business. (Ben & Jerry's: 4.3 percent.) Finally, after items such as taxes and interest payments are accounted for, we come to net income, near the bottom of the statement. Eskimo Pie's is $0.8 million. Divide that by revenues and you get a net profit margin of 1.3 percent. (Ben & Jerry's: 3 percent.) The last part of the income statement is where the company divides its net income by shares outstanding, to arrive at earnings per share (EPS). That's it! _________________________________________________________________ IN THE SPOTLIGHT -- Learn more about margins and other ways to evaluate companies in our How to Value Stocks area. http://www.fool.com/m.asp?i=3D219252 -- Every weekday we feature a "Fribble," usually penned by a member of our online community. These are short essays on investing and/or life. http://www.fool.com/m.asp?i=3D219253 -- Worried about how you're going to pay for your own or your kid's college education? Check out our collection on the topic. http://www.fool.com/m.asp?i=3D219254 _________________________________________________________________ A NOTE FROM THE AUTHOR=01( I hope you're finding this product useful. The content originally appeared as part of our nationally syndicated newspaper feature (which I also prepare). Consider giving your local editor a jingle and suggesting that they think about carrying the Fool. http://www.fool.com/m.asp?i=3D219255 Selena Maranjian http://www.fool.com/m.asp?i=3D219256 _________________________________________________________________ My Portfolio: http://www.fool.com/m.asp?i=3D219257 My Discussion Boards: http://www.fool.com/m.asp?i=3D219258 My Fool: http://www.fool.com/m.asp?i=3D219259 Fool.com Home: http://www.fool.com/m.asp?i=3D219260 My E-Mail Settings: http://www.fool.com/m.asp?i=3D219261 Sponsored By: BUYandHOLD Hey Fool! Want to know the SECRET to long-term investing? Compounding and dollar-cost averaging! Start investing with as little as $20! Just $2.99 per order. http://www.lnksrv.com/m.asp?i=3D219262 ARE YOU ENROLLED IN WIRELESS 201? Don't miss the sequel to the best-selling report on Soapbox.com http://www.lnksrv.com/m.asp?i=3D219263 FREE BOOK FOR FOOLS ONLY! Investor's Business Daily will send you a free copy of 24 Essential Lessons for Investment Success when you sign up for a free trial subscription of their newspaper. http://www.lnksrv.com/m.asp?i=3D219264 BECOME A FOOL! Get a FREE Investing Guide and more... http://www.fool.com/m.asp?i=3D219265 FOOL DIRECT E-MAIL SERVICES Need to change your address or unsubscribe? You can also temporarily suspend mail delivery. Click here: http://www.fool.com/community/freemail/freemaillogin.asp?email=3Dbenjamin.r= ogers @enron.com Have ideas about how we can improve the Fool Direct or new e-mail products you'd like to see? Try our discussion board: http://www.fool.com/m.asp?i=3D219266 ____________________________________________________ © Copyright 2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. MsgId:=20 msg-8990-2000-11-29_15-03-54-5423412_5_Plain_MessageAddress.msg-15:12:45(11= -29 -2000) X-Version: mailer-sender-master,v 1.84 X-Version: mailer-sender-daemon,v 1.84 Message-Recipient: benjamin.rogers@enron.com
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