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                   I N V E S T I N G  B A S I C S
                     Wednesday, November 29,2000

benjamin.rogers@enron.com
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ASK THE FOOL

This weekly e-mail offers answers to questions that perplex most
beginning and intermediate investors and throws in an
investing-related lesson, as well. Enjoy!

-- Q.  What do you think of viaticals as investments?

-- A. Viatical settlements have grown in popularity in recent
years. But they're not without risk and they may make some
people uncomfortable.

Viatical settlements are when a terminally ill person sells his
or her life insurance policy to someone else. Imagine John,
stricken with a fatal form of cancer. He's 36 and is expected to
live only three more years. If he needs cash to pay for medical
bills or just to spend and enjoy, he might sell his life
insurance policy to Jane. If it's set to pay $100,000 on his
death, Jane might pay $66,000 for it. That way he gets a lot of
cash now and Jane expects to get the $100,000 in about three
years. At that rate, she'd be earning roughly a 15 percent
annual return.

There are many risks, though. John may hang on for seven years,
significantly reducing Jane's return. Indeed, a cure for his
cancer might be discovered. John may even outlive Jane! It's
true that these settlements can provide a service for sick
people, but they're not necessarily win-win. The middlemen
arranging these settlements take cuts. Also, if John lives, he's
without his life insurance policy and few insurers will want to
insure him, as he's been so sick recently.

We're uneasy about investing in something that has us rooting
for speedy deaths and against medical breakthroughs. Also, there
have been many instances of fraud with viaticals.

-- Q. What does "shrinkage" mean in the business world?

-- A. It refers to the loss of inventory that happens through
usual ways, such as accidental breakage, theft, weather damage,
etc.

Got some questions of your own for the Fool? Head to our Help
area or post your question on the Ask a Foolish Question
discussion board.
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INVESTING BASICS - IN THE MARGINS

If you're new to investing, you've probably stared at an income
statement (sometimes called a statement of operations) and
scratched your head, wondering what it's telling you. Let us
help.

First, understand that the income statement summarizes sales and
profits over a period of time. It might cover three months or a
year, for example. It will usually offer information for the
year-ago period as well, so you can compare the two and spot
trends.

Here's a slightly dated but nevertheless interesting example.
Let's look at Eskimo Pie Corp.'s income statement for fiscal
year 1998. At the top, as with every income statement, you'll
find net sales (sometimes called revenues). For Eskimo Pie,
they're $63.5 million.

From now on, as we work down the income statement, various costs
will be subtracted from the revenues, leaving different levels
of profit. The item you'll find just under revenues is "cost of
goods sold" (abbreviated as COGS and sometimes called cost of
sales), which represents the cost of producing the products or
services sold. For Eskimo Pie it's $37.4 million. Subtract the
COGS from revenues, and you'll get a gross profit of $26.1
million.

To find the gross profit margin, simply divide the gross profit
by revenues. $26.1 million divided by $63.5 million yields a
gross margin of 41 percent. (Compare results with industry
peers. For example, at a similar time, gross margin was 35
percent for Ben & Jerry's, which has a somewhat different
business model.)

Next, the remaining costs involved in operating the business,
such as support staff salaries, utility bills and advertising
expenses, are subtracted, leaving the operating profit. Eskimo
Pie's operating profit is $1.8 million. Divide this by revenues,
and you get a slim operating margin of 2.8 percent. This reveals
the profitability of the company's principal business. (Ben &
Jerry's: 4.3 percent.)

Finally, after items such as taxes and interest payments are
accounted for, we come to net income, near the bottom of the
statement. Eskimo Pie's is $0.8 million. Divide that by revenues
and you get a net profit margin of 1.3 percent. (Ben & Jerry's:
3 percent.) The last part of the income statement is where the
company divides its net income by shares outstanding, to arrive
at earnings per share (EPS).

That's it!
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IN THE SPOTLIGHT

-- Learn more about margins and other ways to evaluate companies
   in our How to Value Stocks area.
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-- Every weekday we feature a "Fribble," usually penned by a
   member of our online community. These are short essays on
   investing and/or life.
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-- Worried about how you're going to pay for your own or your
   kid's college education? Check out our collection on the topic.
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A NOTE FROM THE AUTHOR(

I hope you're finding this product useful. The content
originally appeared as part of our nationally syndicated
newspaper feature (which I also prepare). Consider giving your
local editor a jingle and suggesting that they think about
carrying the Fool.
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Selena Maranjian
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