This book review of the rise and fall of William Pike's and Patrick Gregory's inventories is brought to you by Kendall King from the Titans investment. : William Pike and Patrick Gregory
Title: William Pike and Patrick Gregory (Buy a book)
- 1 Summary:
- 2 Introduction
- 3 Part 1 – Basics: Getting Started Business, Financial Statements and Shareholdings
- 3.1 Starting a Business
- 3.2 Ownership and Position
- 3.3 Ratios Investors Watch
- 3.4 Going Pubic – Primary a Secondary Offers
- 3.5 Result – JMC Goes Public
- 3.6 Bonds
- 3.7 Why Bonds Rise Up and Down
- 3.8 Convertible Bonds
- 3.9 Most popular and convertible bonds
- 3.10 Part 3 – Firm Balances and Cash Movement  The authors admit that "the topics discussed in this chapter are not issues that are generally heard in the cocktail parties' investment discussions" and could seem greater than accounting points than investment points, however claim that "an informed investor needs to know when something is simply an accounting detail and when it will affect the company's earnings and hence the investment results" (Pike and Gregory, 211). Fastened belongings and depreciation The company's fastened belongings sometimes embrace property, gear and gear, generally referred to as PP&E. These belongings are shown in the stability sheet at their unique value, regardless that we additionally know the wear and tear and tear of gear and gear over time. That is taken under consideration by eliminating the value of these commodities over their anticipated lifetime . , we present the unique value of the asset in gross phrases and much less accrued depreciation in order to get hold of the web proportion and value. Depreciation can also be recognized in the revenue statement for a specific yr, however only within the quantity that occurred throughout that yr. Depreciation is taken into account non-cash because there isn’t a cash move and we solely write an impairment loss. There are several depreciations, and the most typical strategies are direct and accelerated. Direct depreciation reduces the worth of an asset by an equal amount of its annual useful life, whereas accelerated depreciation reduces the worth more within the early years and much less at the end of the asset's useful life. Crucial thing is that the investor should all the time comply with the modifications within the firm's depreciation in order to see what effect it might have on future earnings. As well as, buyers need to watch out that corporations can typically change their depreciation strategies to cover years which might be decrease than anticipated. Cash movement
- 3.11 Money move from operations
- 3.12 Money stream from financing
- 3.13 Money stream from investing
- 3.14 Survival Wants and Free Money Circulate
- 4 Part four – Why Shares Rise (and Down)
- 5 Why Shares Go Up and Down
Why Stocks Rise Up and Down, William Pike and Patrick Gregory are trying to convey the basics that new investors need to understand stock prices
Both factors believe that many investing books were trying they have to convey wisdom without sufficient information. They argue that before you can start evaluating stock price behavior, you first need to understand how the company is created, how it increases money for growth and how it uses its assets to generate cash flow.
Although the book is aimed at readers who have little or no background in investing, there is certainly added value for experienced investors. It is divided into four sections, summarized as follows:
Part 1 – Basic Information: Starting a Business, Financial Statements and Common Position
In this part of the book, the reader creates an imaginary company. It includes common accounting principles and notes that there are differences in the company's balance sheet and income statement. It explains how a company can acquire equity by issuing shares and ending with the company's disclosure.
The authors explain that most companies are financed by combining equity (shares) and debt (bonds and bank loans). The fundamentals of the bonds are presented together with the overview of the preferred shares and other hybrid values. Pike and Patrick provide information on when companies may choose to use them.
Section 3 – Company Balances and Cash Flow
This section defines fixed assets and provides details on how companies will eliminate the value of these assets over time and their impact on revenue. An overview of the cash flow statement is presented and free cash flow is defined and its importance for stock price behavior.
Part 4 – Why Stocks Rise (and Down)
This last section presents a number of common stock metrics to determine when stocks are undervalued and thus represent buying opportunities. Provide a good explanation of why stocks are rising and falling, and includes the key idea that stock markets anticipate future events.
Why William Pike and Patrick Gregory present stock basics are all investors striving for success. It causes most of the other investing books to try to express wisdom without first passing sufficient information, which has led to the book being referred to as "the ebook you need to understand other funding books."
It is divided into four parts:  Company Formation, Introductory Financial Statements and Joint Share
The authors believe that it is not possible to try to understand the behavior of stock prices without first understanding how the company starts, raises money and uses funds.
Starting a Business
The book begins with a fictional story that Jones started with a mouse trap company (JMC). His trusted friend and accountant, Mr Greenshades, agrees to help him in the process. He explains that JMC is currently the sole owner, which simply means that Jones owns the entire company.
He advises Jones to keep accounts in the same way as most other companies, and urges Jones to own two primary financial statements: balance sheet and income statement.
The balance sheet describes the financial situation of the company at a given moment and has three main categories:
- Property – any value owned or claimed by the company  Debts – liabilities that the company owes
- Owner's equity – a combination of the amount of money owned by the owners and the potential profits
As the name implies, the balance sheet must be perfectly balanced. amount of debt and equity of owners. The income statement shows the company's income (sales), sales expenses and the result for a certain period. The profit and loss account is generally referred to as profit or loss (P&L).
Ownership and Position
The business is doing well and Jones wants to expand its business by buying some land and building a small factory
. ] At this point, the JMC does not have much money or wealth. This means that the bank is unlikely to borrow the money it needs for the JMC simply because it is too risky. Since Jones does not want to add his own money to his company, Greenshades suggests that he raise his equity.
He explains that equity is money that is permanently invested in the company against ownership. . Unlike bank loans or loans, you never have to pay this money back.
Four friends of Jones believe in him and agree to contribute to the money needed by the new factory in return for 40% of the company (each 10%). . As equity investors, they want to risk their equity because they know that if JMC is profitable, they can get back their investment and more through dividend payment
Dividends are one way companies share with investors a percentage of income
. In addition, these investors hope that their share in the company will be appreciated over time and that they can be sold much more than they have given.
Greenshades explains that stock can be used to own a business. They decide to set up 100 shares, of which Jones will hold 60 shares, and each investor will receive 10 shares. The number of shares is purely arbitrary; it could have been 10 or 1000 as long as the percentages were the same.
Moreover, as there are currently 5 investors, the JMC is no longer a private company and must be converted into either a company or a partnership.  He explains that the company is a legal entity separate from the company's owners.
The company's primary interest is limited liability of the owners, which means that they are not personally liable for the company's debt. . This differs from both private and partnership liability agreements, which require the owners to have their own funds to pay their debts.
They agree to include and convert the name to JMC Inc.
Greenshades explains that they are now all shareholders and therefore have the right to certain rights. These include receiving the company's annual report, attending shareholders 'meetings, and voting on matters raised at shareholders' meetings.
These rights are the same for all owners of large companies, such as Apple or Disney, except that these companies have millions of shares and no one usually owns more than 1–2%, while many own much less. Larger companies also have a board of directors, elected by the shareholders and representing their interests.
Ratios Investors Watch
To see how well a company is doing, investors often look at their annual report, which publishes information about the company's business prospects and finances. Although these reports may look very threatening, they are one of the most important sources of investor information.
The authors state that
”When the asset manager first analyzes the balance sheets or profit and loss accounts, they all see the same moral as the layman sees. In order for these figures to be meaningful, to assess the financial strength or weakness of the company and to obtain information about potential equity market results, the financial analyst must look at the relationship between these figures. ”
Pike and Gregory, 41
Relationships can be divided into five groups:
- Inventory Assessment – Describe what value you get for a particular share price
- Profitability – Measures for Administrative Efficiency
- Debt and Interest – Determine the Company's Gearing Determine It relative risk and ability to raise extra money if necessary
- Liquidity or financial condition – Ability to repay debt in the short term
- Efficiency – Describe how well the company manages certain assets, such as stock
Assessing Your Business Performance and Getting Information on Stock Movements
Going Pubic – Primary a Secondary Offers
There may be two main reasons for a company.
- The company wants to raise capital and does not want to borrow or acquire any other private offer. This leads the company to write new shares and sell them to investors.
- The current shareholders of a private company want to sell their shares and raise money for themselves.
In either case, the company must register the shares they wish to sell with the Securities and Markets Authority (SEC) and disclose certain financial information to enable potential investors to assess the company.
When a company sells new stocks, this is called the primary offer. For the first time, when a company registers shares and sells them to the public, it is called its first public offer (IPO).
When current shareholders sell already outstanding shares to either public or other private investors, it is called a secondary offer. Technically, every transaction in the New York Stock Exchange or Nasdaq is a secondary offer, but is usually referred to as a trading
Result – JMC Goes Public
JMC Inc. has grown steadily and currently has 12 investors and a total of 500 shares. It is still a private company, and Jones wants to raise money to build another plant to continue growth.
He investigated the possibility of obtaining a loan, but the bank said that debt and interest rates were again too risky to lend to them. Greenshades suggests that they take the company into public and that Jones will contact the investment bank. Investment banks have nothing to do with banking, as is usually referred to.
Instead, they help companies to raise money by serving as a bridge between companies that want to sell shares or bonds, and members of the public or institutions who want to buy. Jones is in contact with Gaines, an investment bank with experience in publishing similar companies.
Since JMC plans to launch a public offering, some of the current shareholders decide to sell some of their own shares as a secondary offer
Gaines tells Jones that the price of the share is related to how well the company has done in the past and how well it is expected to do in the future. He believes that, in view of the company's expected growth rate and market outlook, the stock should be sold at a 10 to 12-fold price / benefit ratio (P / E).
This means that if JMC was expected to earn $ 2 per share this year, the new share should sell at $ 20 and $ 24 per share.
Gaines also points out that JMC wants to sell its shares at the highest possible price for two reasons:
- To maximize the value of sales companies
- To ensure that the company can raise the necessary funds to sell as little shares as possible
Dilution occurs when the shares of the company lose their value
It is responsible for cutting the same pie (result) into several parts (stock). Giving new shares with the highest possible P / E ratio will result in the lowest dilution, but if the asking prices are too high, people will be reluctant to buy. Here we see "the two sides of capitalism". "Then again, buyers who want to invest their capital (money) in the event that they see the quickest progress.
However, there are corporations that need capital. the power to increase cash and improve the production of these merchandise ”(Pike and Gregory, 82) Jones is committed to working with Gaines, who pays a small premium for every share bought, and JMC Inc. might be revealed. , Main Shares and Hybrid Securities
Most corporations are funded by combining equity (shares) and debt (bonds and bank loans).
Often, companies are extra possible to acquire fairness once they have a high P / E ratio, as this reduces the dilution effect and improves their debt ratios
If an organization has a comparatively low P / E ratio and their debt ratios are affordable, they are possible to increase money by promoting bonds. Companies should increase money in any method that leads to the very best earnings per share. This section introduces strategies aside from the bizarre shares utilized by corporations to increase capital.
A mortgage is an agreement between a money-borrowing company and money-giving persons or institutions. They are often bought at a nominal value of $ 1,000, with an outlined interest rate (referred to as a coupon) and a due date (the date when the $ 1,000 capital is repaid).
The bond coupon yield is defined as the annual coupon divided by the nominal value. Coupon payments are sometimes made on a semi-annual basis (twice a yr), however could also be quarterly, monthly or yearly
In contrast to stocks, bonds are often supported by a specific asset or group of belongings, which signifies that the corporate is unable to pay the principal or curiosity repayable and goes bankrupt
After they have been bought to the original house owners, they’re typically bought within the secondary market
When the sale of a $ 1,000 nominal bond is greater than a pair of dollars ($ 1,000), we say it sells as a reward. Similarly, if it sells less than a par, we are saying it sells at a reduction. It will be important to word that when the bond worth rises, the coupon is a smaller and smaller half of the worth, and the current bond yield (coupon divided by the current worth) will lower.
defines the chance that each one future curiosity and maturity funds will probably be made on time. Though many buyers analyze the companies' monetary statements alone, there are several businesses that assess the creditworthiness of the company
These scores range from AAA and AA, that are thought-about very protected up to C and D scores
BBB or better. Bonds are thought-about to be an investment grade, while the bonds listed under are referred to as excessive yield or "spam". That is due to a much greater chance of default and limited liquidity (the power to buy / sell easily).
The bond yields are inversely linked to their credit scores, which simply signifies that buyers require a better coupon to take extra danger
Why Bonds Rise Up and Down
Two Key Elements stemming from Bond Market:
- Altering Interest Charges Rate of interest management is often driven by State coverage. When interest rates rise throughout the financial system, the coupon for brand spanking new bonds will improve. This can permit buyers to promote their previous bonds, which can drive down the worth (and the rise in yield) until the yields of similarly valued bonds are roughly the same.
- Modifications in Creditworthiness Bond prices are additionally delicate to modifications in creditworthiness, but rather more subjectively than modifications in interest rates. If the credit standing of the bond issuer weakens, buyers will promote the bond until the worth is lowered sufficiently to compensate for the increase in danger. For example, if a previously AA-rated company was lowered to A, the worth of its remaining bonds would in all probability fall until the return was comparable to the market value of different A-rated bonds
Convertible Bonds are identical to abnormal bonds except they are often converted to stock sooner or later in the future at a specified conversion fee (quantity of shares / bonds). This function can supply unique advantages for each buyers and businesses.
The prices of convertible bonds differ in another way from normal bonds
If the converted value (conversion price x share worth) is larger than the present market worth of a bond, the worth of the convertible bond is likely to rise consistent with the corresponding strange share worth.
Nevertheless, if the share worth drops considerably under the conversion price (face worth / conversion price), the bond is unlikely to comply with the stock degree for other comparable bonds with the same return. This provides buyers the chance to achieve an growing share worth whereas limiting their danger.
There are additionally advantages for the issuing firm.
First of all, they are possible to give you the chance to sell the bond at a decrease yield than the returns of other similarly rated corporations as a result of there are big upside potential buyers. In addition, if a bond is converted right into a share, the company will not have to make any curiosity or capital funds associated to it.
Nevertheless, one of the most important disadvantages for the corporate is that it will increase the share of the remaining shares. This effectively undermines the ownership of different shareholders and reduces earnings per share (as shown in section 1).
Most popular and convertible bonds
A most popular share is a capital that is bought with a hard and fast dividend that is comparable to a bond. Main funds, as it’s typically referred to as, might or might not have a set lifetime, and credit institutions also consider it in the identical approach as bonds.
At first glance, it might seem extra like a bond. In spite of similarities, there are two principal differences between the preferred shares and bonds.
First of all, there isn’t any contractual obligation to pay dividends on most popular shares because it’s a bond. Secondly, bond yields are expenses which might be deducted from gross sales before tax assessment, whereas favorable dividends are paid after tax profit
Probably the most vital difference between most popular shares and odd shares is the consistency of the dividend. The overall dividend is paid on the discretion of the Board of Administrators and might range extensively, while the preferred shares pay a hard and fast dividend determined at the time of problem.
Although the preferred dividend just isn’t technically a contractual obligation, it’s anticipated that unpaid payments will severely injury the company's status (score) and forestall future borrowing
Corporations typically give inexpensive shares once they have a low P / E ratio (which makes the shares unrelated) and a weak debt-to-interest ratio (which makes the difficulty or borrowing of bonds from the financial institution). Other corporations and tax-free accounts, such because the IRAs, are the dividends of the most important desired shareholder, which provides a big tax deduction for dividend revenue from most popular shares.
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