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The bottom line for investing in stocks



basic material sector companies can have a consistent bottom line

The BL of a company is its total earnings—net income for a certain amount of time, usually a year. It is looked at by many as the most important part in deciding to invest in a company. The truth is that the bottom line is an important thing but it is not as important as many people think. Pretend you owned a company that last year made 1 million dollars and then the next year made 2 million. The stated scenario sounds like a good deal but pretend the year the company made 2 million it also incurred 20 million in long term debt compared to the previous yeah in which you only had 5 million in debt; doesn’t sound like such a good deal anymore does it? The point here is that companies can make more money and still be doing horrible in general or worse than they were when they made less money in net income.

Another thing about the so called bottom line is that it doesn’t include capital expenditures to be spent on the business expenditures. A capital expenditure happens which a company buys new equipment or machinery which is many times necessary to keeping the company alive against its competition. Many times capital expenditures are a necessary evil, but many of the earnings a company makes in a year may not go to being paid as a dividend or even used to increase the shareholders new worth, rather the company has to spend things just to keep the company alive. Remember the best business are the ones that don’t have to worry about competition as much and they can simply just give money to you as a shareholder—owner of the company.

Many investors are not aware of how this works, so they buy companies based on earnings instead of also looking at long term debt, capital expenditures, and cash on hand all of which are equally important. The return the company can generate off investing capital is also something that is very important to look at before investing your money. The moral of the story is do not invest in a company just because they have had better than expected earnings because there are a lot of other things to consider in the long run besides just earnings for the long run future of any company.