Saturday, November 15, 2008


I have been a believer in energy companies and precious metal mining companies.  

There is, however, a chasm at work in this sector.  Leverage.

Particularly in the midst of a credit crisis, even companies with attractive assets can wind up in trouble.  While I cannot give specific advice on COMPANIES in this forum, I can point out a couple of metrics that really matter (but of course are not EVERYTHING).

The first is the Debt to Equity ratio.  Any number above 1.0 means that the organization is employing significant leverage.  Here is a link to the financial statistics for GE at Yahoo Finance.  Scroll down to the "Balance Sheet".  Notice the Debt/Equity ratio?  Now compare this to Exxon's.  

Also, get to know a company's current ratio to be sure that there are no short term issues lurking that could cause you grief.  Remember, when you buy a company for the dividend the bond holder's come before the shareholder's and their dividend.  The greater the leverage, the greater the risk of a dividend cut in the middle of a credit crisis or economic downturn (all else being equal).

A low multiple stock using moderate or no leverage with a low price to sales ratio would give me a great deal more confidence to continue to consider the company's long term prospects.  

When things are this bad the prices of most stocks are probably well deserved.  In the middle of all of carnage there is a good chance that some companies with great futures are having their share prices savaged, too.  You gotta find these companies, or you you gotta stay in cash.


I continue to advocate Gold and Silver for some portion of your holdings.  

Good Luck!

Mentatt (at) yahoo (d0t) com

1 comment:

Anonymous said...

How much longer before GE comes hat in hand looking for a government bailout, also?