High income, low price make for good buy

Q: If I’m drawn to a young and growing company, what should I look into before investing in it? — T.S., Bradenton, Florida

A: First, make sure the company has competitive advantages. These might include a strong brand, a solid reputation, valuable patents or economies of scale.

Check out the financial statements it has filed with the Securities and Exchange Commission (www.sec.gov/ edgar.shtml). Its income statement should feature growing sales (sometimes called revenue) and income. On its balance sheet, figures for inventory or accounts receivable should not be growing faster than sales. Heavy or quickly growing debt are additional red flags.

Look at the company’s statement of cash flows to see how it’s generating cash. Ideally, most cash should come from ongoing operations — the making and selling of products or services — and not from issuing debt or stock or selling property.

Finally, assess how attractive the price is; while a company may be terrific and promising, you don’t want to overpay for its shares. Compare its priceto-earnings (P/E) ratio or price-to-sales ratio to its five-year average — which you can find at www.morningstar.com.

Fool’s school: Understanding ‘The Dow’

When you hear of “the Dow” in the news, you might think the term refers to the entire stock market. It doesn’t — and the Dow is surprising in other ways, too.

The Dow is an index of a tiny subset of the United States stock market, comprising just 30 companies. Its full name is the Dow Jones Industrial Average, and it was launched in 1896 with just 12 stocks, which included nowobscure names such as U.S. Leather and National Lead. (General Electric is the original member you’d most likely know, but it departed the index last year.) Current companies include Apple, Caterpillar, Coca-cola, Home Depot, IBM, Johnson & Johnson, Mcdonald’s, Nike, Verizon Communications, Visa, Walmart and Walt Disney.

For an index that better reflects the overall market, consider the S&P 500, which contains 500 of America’s biggest companies, which together make up about 80 percent of the overall market’s value. (The Dow makes up 25 to 30 percent of the market value of the S&P 500.) You can go even broader with the Dow Jones U.S. Total Stock Market Index.

It’s good to understand what the Dow is and its place in American financial history. But if you want a good sense of how the overall market is doing, look at the S&P 500 or a total stock market index instead. Also, don’t get excited by headlines such as “Dow plunges 200 points.” With the Dow recently near 26,000, 200 points is a move of less than 1 percent. Focus on percentages, not points.

Name that company

I trace my roots back to 1868, when my namesake founded me. Today, I’m one of the largest businesses in India, encompassing 30 companies in a wide range of businesses, such as vehicles, steel, beverages, energy, hotels, aerospace, telecommunications, financial services and chemicals. My companies own other companies, such as Jaguar Land Rover Automotive. I operate in more than 100 countries, and most of me is owned by philanthropic trusts that support health, education, arts and more. I rake in more than $100 billion annually and employ more than 700,000 people. My name sounds like a synonym for “goodbye.” Who am I?

Last week’s answer

I trace my roots back to 1943, when a teenager founded me in Sweden. I opened my first location in the United States in 1985. With hundreds of stores, almost all franchised, I employ over 200,000 people. My stores receive almost a billion visits annually. I’m known for my low prices, innovative designs, flat-packed furniture, funny product names and meatballs. I sell a “Billy” bookcase every 10 seconds. I use 1 percent of the planet’s wood supply and almost 1 percent of its cotton, and I am committed to sustainable sourcing. I’m one of the world’s largest privately held companies. Who am I? (Answer: Ikea)

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