Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Non-Tech : GRIN (Grand Toys International Inc) -- Ignore unavailable to you. Want to Upgrade?

To: Frank McVerry who wrote (62)	11/28/1998 2:39:00 PM
From: Frank McVerry	Read Replies (2) \| Respond to of 495

GRIN's attractive ROE (This is a bit of a ramble but for those wishing to revise ROEs, it may be worth your time) After 'stocks 101', I understood that 'high ROE=good' and 'low ROE=bad', but that's hardly understanding what's really going on with a company - there must be a better way of getting a feel for this. My way is to relate ROE to the business of rental real estate. ROE for me is the most important number for honestly assessing whether a rental is good business or whether it's a waste of time. For example, if I have equity of $30000 in a rental (market value - outstanding mortgages) and it's giving me a bottom line annual profit of $3000 then I'm happy (ROE=10%), but if the annual profit is only $300 (ROE=1%) then it's time to sell that puppy and put the equity in a savings account (ROE of 3% without the tenant/repair/vacancy headaches). So high ROE=good, right ? Well, not quite. Let's say I am using so much 'leverage' (a big mortgage) that now my equity is $3 but my annual profit is $2 so my ROE=66%... wonderful, right ! Nah, not really. The first unexpected minor plumbing job or a vacancy one day longer than allowed-for and that fabulous ROE is not only reduced to zero but becomes a big negative ROE. So we need a nice high ROE, as little leverage as possible and a profit which will not disappear when an unexpected lightbulb replacement is required. A rental property with an ROE of 25% or more and with little or no leverage required, represents an excellent real estate rental investment. .....Now let's look at GRIN. GRIN is showing an ROE=36.4% on the CBS stock screen which is great but now I know to check GRIN's leverage (long term debt) before I judge that this is a good number...My goodness, GRIN has NO long term debt, so, for me, this represents a great business making very effective use of the available equity. So how much did the 'market' value this great little business ? Just 4 short weeks ago all the outstanding management-held/insider /public stock was valued at about $3M. This for a business which had returned an annual bottom-line profit of $1.57M in its last financial year...AND ALL THIS BEFORE FURBY APPEARED ON THE SCENE ! So far this year, GRIN has banked bottom-line profits of about $670000 for the first 3 quarters and before the best 4th quarter. It has achieved this DESPITE the merchandising difficulties of their biggest customer, ToysRUs, DESPITE the higher container shipping costs brought on by the Asian crisis and DESPITE a devalued Canadian dollar...Imagine how they'll do as these things sort themselves out. For those still with me, Have a good holiday weekend, Frank (BTW: GRIN had the second highest ROE in the list of toy sector companies of message#55 . The company, CTI, with the highest ROE ? They have a long term debt/equity ratio of 62%, compared with GRIN's 0%).