Ask the Fool: Pro forma
Q: What does “pro forma” mean on a financial statement? — C.V., West Hartford, Connecticut
A: Instead of presenting a company’s financial performance or condition based solely on generally accepted accounting principles (GAAP), a pro forma document answers a “what if” question, reflecting assumptions or hypothetical data related to past or future events like acquisitions or divestitures.
For example, imagine that Pfizer merges with Netflix midyear (“Movies that heal!”). When the combined company reports its finances at the end of its fiscal year, it might include a pro forma statement reflecting operations over the whole year as if it had been combined all year long. The companies might also offer pro forma statements when proposing their merger, showing what their combined performance might look like.
Pro forma statements can be useful, but not always — for example, a company might show earnings it would have had if various bad things hadn’t happened.
Q: What are zero-coupon bonds? — D.H., Merriam, Kansas
A: With a typical bond, you lend money, usually to a company or government. If you buy a traditional $10,000 bond with a 5% interest rate, you’re lending $10,000 to the borrower and you can expect to receive interest payments of 5% per year. (In the past, you’d have had to send in coupons in order to receive these payments.) When the bond matures, you get your $10,000 principal back.
With a zero-coupon bond, you collect no interest payments, but the amount you lend is less than what you’ll receive at maturity. So a zero-coupon bond might pay you the equivalent of 5% per year by having you lend $6,139 today in order to receive $10,000 in 10 years.
Fool’s school: Money-saving travel tips
Many people like to take trips in the summer. If you’re planning to travel, here are some tips that could save you money and/or hassles:
- Keep your passport up to date so that you don’t have to pay for expedited renewals.
- Look for the best deals on flights, hotels, rental cars and more at sites such as Expedia.com, Orbitz.com, Kayak.com, Travel.Google.com, Skyscanner.com, Airfarewatchdog.com, Priceline.com, AutoSlash.com, Airbnb.com, Vrbo.com and Booking.com.
- Once you find the best deal, it can be worth booking it via the airline or hotel’s own website. If you need to change your booking later, it can be easier.
- You may get the best fares by using a private or “incognito” browser window, foiling the website’s attempts to track your interest.
- Research your destination before departing, looking for the best things to see and do, and perhaps inexpensive or free things to see or do.
- Consider using an experienced travel agent, as they can do much of your planning and booking for you. They may charge a fee, but they may also deliver a better vacation.
- Pack light. You’ll save on baggage fees, and you may have more room to bring back souvenirs.
- Don’t eat at restaurants all the time. Visit local supermarkets for snacks and some inexpensive meals.
- Consider travel insurance if you think you might need it — and know that your credit card might already offer it.
- If you travel frequently, you might use a travel rewards credit card that can get you discounts and perks. (Search for “best travel rewards cards” online.)
- If you’re traveling abroad, check for travel advisories from the State Department at Travel.State.gov.
- If you can, visit your destination in its off-season, when prices are lower and crowds thinner.
Have a trip budget — and stick to it. You don’t want to charge more than you can afford and then come home to a mountain of debt.
Bon voyage!
My smartest investment: Banked on it
My smartest investment move happened when I worked for the Royal Bank of Canada in the ’80s and ’90s. When they introduced what we’d call in the U.S. an employee stock purchase plan, I invested the maximum — 3% of my gross earnings — which the bank generously matched. When the shares vested, all my workmates cashed theirs in. I kept mine, and they’re now worth well over a quarter of a million dollars. They even give me a hefty dividend every quarter. — J.L., Escondido, California
The Fool responds: Your wonderful story offers multiple lessons. The first, of course, is the power of simply hanging on to companies that are growing in value. Another is the (often underappreciated) value of dividends. If your holding is worth $250,000 and the dividend is currently yielding, say, 3%, you’d be looking at $7,500 in dividend income — annually. (Plus, dividends are often increased over time.) But your effective dividend yield would be far greater than that 3%, since you invested much less than $250,000 and now collect $7,500 annually. If you invested only $50,000, your effective yield would be 15%.
All that said, remember that it can be risky to have too much of your net worth in your employer’s stock — think of Enron, for example.
(Do you have a smart or regrettable investment move to share with us? Email it to [email protected].)
Foolish trivia: Name that company
I trace my roots back to the Jersey Shore in 1956, when my founder opened one of America’s first submarine sandwich joints. In 1975, a teenager working for me bought me from the owner — he’s still the CEO of my franchise system today. Today, with more than 3,000 locations open or planned, I’m a major sandwich maker. I feature a “Month of Giving” and have raised $113 million for local charities since 2011. On my “Day of Giving,” 100% of sales (not profits) go to charities. Entrepreneur.com recently named me the second-best franchise in the U.S. Who am I?
Last week’s trivia answer
I trace my roots back to the 1953 formation of Fuji Heavy Industries (which began as the Aircraft Research Laboratory in 1917). My early vehicles included the 360. In 1972, I introduced the world’s first mass-produced four-wheel drive passenger car, a station wagon. Today, with a recent market value north of $16 billion, I’m a major global automaker, with more than 630 retailers in the U.S. — where I offer a “Love Promise,” aiming to love and respect everyone and to support my customers and their communities. My logo makes astronomers smile. Who am I? (Answer: Subaru)
The Motley Fool take: Powersport profits
A good place to hunt for promising investments is among downtrodden stocks. Some will be downtrodden for good reason and should be avoided, but others have been overly punished for seemingly temporary problems. Powersports specialist Polaris (NYSE: PII) is one such stock to consider.
Launched in 1954, it has grown into a major maker of off-road, on-road and marine vehicles, including Indian motorcycles, Timbersled snow bikes, Sportsman all-terrain vehicles (ATVs), and Ranger and RZR side-by-side utility vehicles. For many of its product categories, it’s ranked No. 1 or No. 2 in market share.
Polaris’ stock was recently down by more than 40% from its 52-week high. Steeper interest rates and inflation may have kept some customers away, hurting their ability to finance purchases. But the company has been shedding some of its divisions in recent years, such as an auto supply business and a fishing boat operation. Polaris is leaner now and more focused, and it’s poised to benefit whenever interest rates start falling.
Its stock looks attractive at recent levels, with a forward-looking price-to-earnings (P/E) ratio of 10.4, below its five-year average of 11.9. The fall in its stock price has pushed up its dividend yield, too, recently to 3.2%. And Polaris has been repurchasing many shares, boosting the value of remaining shares. Long-term investors may want to take a closer look.
— distributed by Andrews McMeel Syndication
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