Rick Smith was at his wife's annual office party and having a good time meeting the folks with whom his better half spent 40 hours a week. Rick was quite shocked to see the gluttonous Pork Belly making a beeline towards him carrying a plate of chicken wings in one hand and waving with the other. Wiping barbecue sauce on his slacks before shaking Rick's hand, Pork Belly yelped, "Well howdy do buddy! Did you make your million with that stock pick I gave you last year? Whhhooooooooaaaa doggie! Was that a sweet stock to ride or what?"

Rick smiled back and gave a half-blank stare while ransacking his memory for the last stock advice he had been given. He did not remember talking to this (rather large) gentleman before, and he thought he'd remember if he had. Rick did not want to be embarrassed by sounding like he didn't know what he was talking about. He replied, not having a clue what stock the portly Pork was referring to, "Well, uh, no. I think I remember seeing that stock before, but I've been uh, ya know, mad at myself for not buying." Mission accomplished on not looking stupid, thought Rick.

Pork Belly, master of fast talk from his commission-hunting phone calls, quickly replied, "Well, let bygones be bygones. What we have to worry about is the future. Right? Righto! I've got a new stock that my helpin' hands and I just found. This one may be hotter than the last one. Hotter than these here chicken wings!" Pork then paused to slam yet another piece of sauce-laden chicken in his mouth. Rick couldn't help but notice the huge barbecue-drenched diamond pinky ring Pork Belly wore. Rick thought that anyone who could afford that size pinky ring must be rich and successful.

Pork Belly continued, "Royal Flush Casino <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CARDS)") else Response.Write("(Nasdaq: CARDS)") end if %>. This one is going to be huge! Bigger than me! Surely you've heard of them?" Rick again searched his memory banks and vaguely remembered his grandmother saying something about visiting their casinos on her last trip to Vegas. The Pork continued, "Well, they are planning on building a new casino in Detroit that is going to be monstrous! But, that's not the best part... The stock is fire sale cheap! The juicy part is that their earnings before paying the mortgage and Uncle Sam last year were $5 a share! With this baby trading at $9 17/128 on the ask, that means the stock is at a price to earnings bit-da of less than two!"

While he pondered this, Rick remembered that most stocks trade at a PE of around 15, and that the lower price to earnings ratio a stock has, the more a value it tends to be. So, he thought, this stock at a PE of 2 might be a great bargain, and his ticket to early retirement. As Rick began to wonder what the heck "bit-da" meant, a rather svelte looking dude carrying celery sticks came strolling by. Rick saw Pork Belly's face contort angrily as Motley Fool broke into the conversation.

The Fool proclaimed, "Earnings per share (EPS) and earnings before interest, taxes, depreciation, and amortization (EBITDA) per share are two separate numbers. Yes, Royal's EBITDA were rather large last year. But before buying this stock, I think you better double check the recipe. Our friend here is forgetting to tell you a main ingredient."

What is the most important tidbit Pork Belly left out of the story?

1) The amount of debt the company has.

2) The fact that EBITDA per share is not an important ratio to use when valuing casino stocks.

3) The company's trailing revenues.

4) The fact that non-tribal casino gambling in Michigan is currently illegal. A vote on the legalization of private gaming in the state is slated for the next election and any future development there is dependent on its passage.

And the answer is. . . .

Flushed! The answer is 1.

Casinos tend to be highly leveraged entities and normally carry a large amount of debt on their books. This tends to skew the ratios downward, to deceptively attractive levels. Pork neglected to mention that the company has a rather substantial number of bonds outstanding that should be included in any calculations involving market capitalization. Not only does the long term debt cost the company in interest expenses, but bonds must be paid off during a take-over, and they also receive preferential treatment over the stock in any bankruptcy or reorganization.

EBITDA (earnings before interest, taxes, depreciation, and amortization) is one of the most widely used indicators of a gaming company's performance. Otherwise known as the "middle line" or operational cash flow, it is not a replacement for earnings per share. Rather, it is a crucial ingredient, along with the company's debt, in calculating it.

Revenues are important, but a casino company's EBITDA (which Pork disclosed) is a function of revenues and is more important, since it is "further down" on the income statement.

Land-based casino gambling in Detroit was approved by the voters in Michigan during the last presidential election. There are no slot machines in the Motor City just yet, but plans are in the works for opening casinos there in 1998.

"The moral of the story," the Fool said, "is to always look at the bottom line. Something may look attractive on the surface using one number or ratio, but make sure you check out all the facts before investing your money, especially a company's debt and cash positions."

"Will do!" Rick replied as he watched the foiled Pork Belly roll away and reach for another greasy rib.

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