Ask the Fool

Q Can you explain how a company’s earnings per share can rise when its earnings don’t grow? — T.W., Manteo, North Carolina

A That can happen if the company’s share count shrinks, such as via share buybacks. Imagine that the One-Legged Chair Co. (ticker: WOOPS) has 10 million shares outstanding and $60 million in quarterly net income. Its earnings per share (EPS) is $6. If it buys back a million shares and then earns $60 million again in the next quarter, its EPS has suddenly risen to $6.67. (Sixty million divided by 9 million equals 6.67.)

Share buybacks can be good, making remaining shares worth more — as long as they aren’t executed when the stock is overvalued. Paying too much for the shares wastes company (and shareholder) money.

Q I gather that interest rates are likely to rise in the coming years. That will be good for my bank accounts, but what will it hurt? — G.L., Warren, Ohio

A Higher interest rates will be bad news for interest-sensitive sectors of the economy, such as mortgage lending and real estate. Rising mortgage rates can price many potential buyers out of a home purchase, even if they have good credit. This in turn could force sellers to lower asking prices to make them more affordable for prospective buyers.

Those with adjustablerate mortgages (ARMs) will see their mortgage payments gradually increase. Rising rates are also trouble for homebuilders, as they can lead to not only lower demand but also higher inventory carrying costs.

For investors with bond-heavy portfolios, especially retirees on limited incomes, rising rates will likely lead to falling bond prices, which can hurt. The price of gold has been known to fall, too, when interest rates rise.