Invested Credit

0_02909.jpgOver the last few articles we have been discussing the pros and cons of using EBIT and EBITDA metrics to choose investment opportunities. While the revenue-bias of the metric can be fairly well balanced out by balancing out the evaluation with a few more conservative cost-side metrics, it is important to understand exactly what it is that we need to be using these checks and balances, if nothing else for the sake of motivation.

During periods of economic growth, companies begin to aggressively expand their operations so as to make the most of the macro opportunities while they are available. While the smaller companies will do this by aggressively pursuing increased revenues through sales and distribution, larger companies will begin actively acquiring the smaller ones in order to keep their percentage rate of expansion at an acceptably high level. Eventually, this leads to an environment in which leveraged buy-outs become a popular venue for acquisition.

However, as companies continue to pursue debt for the sake of expanding their enterprise value, interest rates will begin to climb to fight the ensuing inflation. This will in turn force companies to find alternative means of financing their acquisitions. Read the rest of this entry »

interest-calcHaving looked at how EBIT and EBITDA can support an investor’s pursuit of understanding what kind of impact management’s decisions are having on a business’ revenue generating capabilities, it is important for us to take a moment to also look at some metrics that can also be used to counter-balance the income-bias that EBIT-based metrics create for us. By balancing the returns of EBIT(DA) against the costs associated with leverage and depreciation-based performance metrics, we can create a much more encompassing picture of exactly how it is that a company is being run.

The first metric that can be used to evaluate the cost implications of management’s decisions is called the Interest Coverage Ratio. The ICR defines the proportion of interest expenses that is covered by EBIT (ie. ICR = EBIT/Interest Expense). The lower the ratio, the more debt that a company is servicing, and the less ability it has to pay off its debts based on its incomes. In general, an ICR of less than 1.5 is considered to indicate that the company’s operational direction has overleveraged itself.

When looking at how the formula is built, it becomes apparent that a change in ICR is an effective metric for counter-balancing EBIT because of the way in which it takes the fundamental costs of debt into consideration against the metric itself. This results in a metric that demonstrates how it is that management’s preference for leverage has exposed it to risk in the hopes of boosting top-line performance. This means that, if ICR is decreasing while EBIT is increasing, management is taking on debt faster than it can earn its way out of it. Read the rest of this entry »

earnings-interestWhen looking at investments, there are two key metrics that analysts return to over and over again to define a company’s profitability. While both EBIT and EBITDA have been surrounded with controversy throughout their introduction to the capital markets, they continue to serve as an invaluable tool for understanding exactly how profitable a company is for shareholders, and what kind of impact both depreciation and interest expenses erode away the margins.

The Earnings Before Interest and Taxes metric was originally introduced to measure the amount of money that investors have a claim to before the fundamental costs of debt and tax are taken out. This is done to measure the operating profitability of the company. Understanding how it is that interest expenses represent the cost of leveraging the company, and taxes are imposed upon the company by outside powers, they do not so much reflect the benefits of operating decisions as they do the costs and implications of them.

As such, EBIT creates value for analysts in the way that it demonstrates the ability of management to create nominal returns through their decisions and actions. That being said, it does not take into account the expenses associated with those decisions, and should be taken in consideration against a comparison metric that does exactly such. Read the rest of this entry »

Compact DiscsHaving looked already at how it is that a personal can weigh the costs and financial benefits of learning to play music, it has become somewhat clear how the music industry is able to perpetuate itself with such profitability. While we might not be personally interested in the pursuit of music itself, we might feel as though the actual industry presents an investment opportunity for a personal saver. As such, this article is going to look at the different opportunities for investors to benefit from the music industry, how it is that they produce these returns, and at what risk.

The first, and probably the most obvious way for an investor to profit from the music industry is through a record label itself. These companies earn an income similarly to a bank, in that they effectively lend money to a portfolio of musicians, using the royalties associated with the songs they produce as collateral. From there, the label stands to earn a great deal of profit based on their ability to promote both the live and recorded performances of the songs that they own. These royalties are then passed onto shareholders, and leveraged into further investments in music.

That being said, because of the way in which the probability of a musician being wildly successful is extremely small, a great deal of these returns are further consumed by searching for and promoting a new sensational asset. Regardless, investors have been made wealthy by investing in the assets of companies such as Warner Brothers, and privately in Virgin Media, because of their ability to leverage their sheer scale towards continually introducing the market to new and exciting performers. Read the rest of this entry »

music-hatWhile we took the time to look at all the costs associated with buying, renting, and learning a musical instrument, it is important to remember that music can provide financial returns next to its role as a hobby. Be it through the pursuit of a full career in music, or instead a lucrative hobby, there are certainly options available for musicians to make contract-based income through their talents. In this article, we’ll dive in to a few of the more traditional sources of income for musicians, and how it is that a musician of any level can access them.

The most obvious way for a musician to earn an income through their trade is by playing concerts and selling recordings. Since most artists will never actually see major distribution agreements in their lifetime, it is important to recognize how it is that these products will generally be produced and distributed independently at the concert itself. What I personally find most interesting about this model is the way in which the economies of scale actually most favor the production of an independent CD, because the revenues do not get eaten up by distribution costs. In general, a no-name band will earn between $100 and $7,500 per show played.

That being said, these numbers need to be taken into perspective. Venues will not usually pay the band itself, and will instead allow them to charge cover for ticket sales, meaning that the band itself must promote the sale of their own tickets. This sort of agreement adds a great deal of risk to the equation, because it places the musicians in a position where they need to take on the role of a marketer (one which they are not likely trained for).

From there, they might expect to sell 1 recording for every 40 people that attend the show. This means that they need to be particularly aggressive in promoting their live shows, so as to get the foot traffic to their show. Read the rest of this entry »

music-moneyOur life’s passions are what define us as people. They sculpt our personalities and friends by guiding our interests, and give us a venue for expressing ourselves in the midst of an always stressful modern lifestyle. Personally, I pursue music as my passion. I’ve played over five different instruments in my lifetime, and have made some of my greatest personal connections through music.

That being said, I have always pursued it as a side hobby, and never really thought about my musical hobby as a financial investment. In the interest of further demonstrating to the world the value of maintaining a balanced lifestyle, I look forward to using the next two articles to discuss the time and economic value that lies in the pursuit of learning a musical instrument.

The first cost of music is a fixed one. Before we can begin practicing, we need to obtain an instrument. This can range from an expensive instrument such as a piano (which costs as much as $500,000), to a cheaper instrument such as a guitar (which can be purchased for as little as $100). Common band instruments such as the saxophone and trumpet then range from between $300-3000, depending on the quality of instrument purchased.

That being said, rental options have become widely available over the years. For example, an entry-level piano can be rented for as little as $60/month ($720/year). Alternatively, a guitar can be rented for as little as $10/month, and a trumpet can be rented for $32.

In general, these rental rates break even after a period of 1-3 years, meaning that a renter is able to try out an instrument for as long as three years before they have a financial incentive to actually purchase the instrument at all. What’s more, many larger music stores will offer a rent-to-own program, meaning that the renter has the option to purchase out the remaining value of an instrument if they carry it for a period of time. This means that we have all the financial incentive in the world to try out different instruments and styles of music before we commit to pursuing a specific one. Read the rest of this entry »