Hey Guys,

You could be making a huge valuation error. This is really simple and only requires middle school math. A lot of people use Debt/Equity Ratio for their valuations of companies. Most of these people just go to money sites and get a quick ratio’s. Now, I am not saying there is anything wrong with these sites. However, there is something wrong with the Debt/Equity Ratio.

See Debt to Equity Ratio only factors in long-term debt. Which only long-term debt is divided by shareholders equity for that time period. What you should be using is a formula called total liabilities/equity ratio. Total liabilities is all debts that are owed by a company, not just long-term debt.

Long-Term Debts/Shareholders Equity = D/E

Total Liabilities/Shareholders Equity = TL/E

Off the top of my head take Ford Motor Company for an example. For the year end of 2005, using the Debt/Equity formula you will be getting around 11.91 D/E. When you use the Total Liabilities formula you will get about 20.4 for TL/E ratio for the same period.

Another example is Lucent Technologies. For the year end of 2005 the D/E ratio gives you 13.50. While the TL/E is 42.73. What a difference, a little over 3 times as much. Which the 13.50 is already high risk. Which 42.50 makes it outrages.

Now, on the other hand companies in good financial condition like Microsoft. Only have a Total Liabilities/ Equity Ratio of 0.735 on the year end of 2005.

For both of these valuation ratios lower is better, usually.

That is all I have to say for now.

Thanks for Visiting

Hey Guys,

I am going to explain some of the basics of understanding how money works in our economy. For example, what happens when the federal reserve lowers interest rates? I will get to that question later. Right now, I am going to start out by explaining the money supply.

What is the money supply? Money Supply is the amount of money the Federal Reserve Bank makes available for people to buy goods and services. There are different categories for the level money supplied is defined. Such as M-1,M-2, and etc., etc. M-1 is coins, paper bills, money that is available by writting checks, and money that is held for traveler’s checks. M-2 is everything in M-1 plus money in savings accounts, mutual funds, market accounts, certificates of deposit.

Why Does the Money and Supply Need to be Controlled? Think about this. If the Gov’t and the Federal Reserve made twice as much money available as there is now. What would happen to prices?

Prices would go up, as people keep buying and the demand for items go up. Yep, you guessed it. This would be called inflation. The saying of “too much money chasing too few goods”. This is a good way of remembering how the basics of Inflation works.

What happens when the Federal Reserve raises and lowers interest rates? First of all, the Federal Reserve is the banker’s bank. Your hometown FIDC bank, borrows money from the Federal Reserve and passes it on to you.

When the Federal Reserve raises interest rates. This discourages member banks from borrowing and reduces the number of available loans. Resulting, in a Decrease in Money Supply.

Now, lowering interest rates. Will have the opposite effect. Which will encourage member banks to borrow MORE from the federal reserve. Then increase the number of loans available, which will Increase the Money Supply.

Hmm.. This kinda of makes a little more sense, of why the Federal Reserve raises interest rates to hedge against inflation. Almost, like the Federal Reserve takes money out of our economy. When we have to much money in the economy for our own good. Remember, this is a little part of inflation and interest rates. There can still be other effects and ways to hedge of against inflation.

Thanks for Visiting