Bankruptcy and losses

If one of my holdings goes bankrupt, do I lose my entire investment? — T.L., Batavia, New York

It all depends on how the bankruptcy unfolds. Some companies file for bankruptcy protection and then fix their businesses, as General Motors and former American Airlines parent AMR did. Others, though, such as Pan American World Airways and Circuit City, don’t. Even those can still be worth something if they can sell their name or other assets, or if they’re bought by another company.

Common-stock shareholders, unfortunately, tend to receive little or nothing when a company’s assets are sold; they’re last in line to collect, following creditors (banks, bondholders, suppliers, etc.) and holders of preferred stock. Companies also often emerge from bankruptcy with their original stock (the ones shareholders owned) having been deemed worthless and canceled, and new shares issued.

Aim to keep up with your holdings and their progress, so that you’re not surprised by a bankruptcy filing. At least read their quarterly and/ or annual reports.

Can you explain the term “run rate”? — S.S., Knoxville, Tennessee

A run rate annualizes numbers, making it easier to see how a company is doing. Imagine, for example, Farm Dogs Inc. (ticker: BINGO), which is growing quickly. If you add up its last four quarters’ worth of sales, the result would not reflect its current strength, as each quarter’s numbers have been rising.

If you instead take the most recent quarter’s sales — of, let’s say, $25 million (up from $20 million the quarter before and $17 million before that) and multiply that by four, you’ll get the company’s current run rate for sales: $100 million. It more accurately reflects the current level of annual sales.