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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: CrazyPete who wrote (24466)	7/27/2006 3:54:34 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78752

Yes, that hypothetical industrial co. presumed to be going from $10 to $14 caught my attention too. Trying to remember my experiences with industrial companies, I suspect that for most industrial companies, if they have to spend $9 (i.e. the expense) to make $10 in sales, they might not so easily or possibly be able to get another $4 in sales (40% sales increase) by spending only $2 more ($14 sale with only $11 expense). Industrials sell something that has a very high cost-of-goods sold component, so expenses can often remain high. As you suggest though, when somebody starts putting out "But what if..." scenarios, it can degenerate into an absurd debate.

To: CrazyPete who wrote (24466)	7/27/2006 6:07:29 PM
From: bruwin	Read Replies (2) \| Respond to of 78752

IMO, for an Industrial type company to feature in the top echelon it needs to meet or exceed certain targets based on certain specific financial ratios from within its Financial Statements. Two of these are associated with the long term debt ratio in its Balance Sheet and the relationship between EBITDA and its Interest Expense on its Income Statement. Based on GE’s current Interest Expense it is failing miserably in this regard. Yes, it may be making a positive return from issuing bonds, but this is at great Expense on its Income Statement. If GE was able to generate the equivalent of even 75% to 80% of the Revenue it obtains from its Capital business, from its traditional Electrical business, and did this with great efficiency and superb management control, then we would see far less effect of Expense on its Income Statement with a concomitant increase in its Bottom Line, and greater Income for Shareholders. As far as I’m concerned, I couldn’t care less how GE, or any other company for that matter, obtained its Revenue as long as it was maximising its profits with the minimum amount of debt and associated expense. I don’t have a problem if a company has borrowed money to positively enhance its business. But there comes a "break-even" point when the affect of that debt impinges too heavily on its Income Statement. And whether you’re prepared to accept it or not, the fact of the matter is that the Market also doesn’t appear to have been that impressed with GE’s performance over the last 18 months, judging by the fall off in its stock price. IMO the Quality of a company’s Financial Fundamentals is reflected in the medium to longer term trend of its stock price. I don’t sweat the short term movements, but I do take cognisance of the longer term trend. Needless to say, you may see GE’s current Fundamental "status" different to me, and that’s your prerogative.