Cold Call Pete, equity hypester extraordinaire, was relaxing one morning, reading his favorite publication, The Broker's Cheat Sheet. Suddenly a company caught his eye. It seemed that a new tech firm, Tater Chip Technologies [Nasdaq:RFFL] had come out with a new chip design that was wafer-thin and rippled. The significance of the innovation escaped him, but that didn't matter much. It's a tech stock, he figured, so it had to be easy to tout. It also seemed to be trading very heavily, which made his job almost too darned easy. Ahh, the joys of hype.

Grabbing the phone, Pete dialed the number of his favorite customer, Fred Buysalot.

"Fred! I've found this new chip maker that looks to be a ten-bagger! Not only have they developed a new rippled chip, but those clever folks on Wall Street have taken notice as well. Look at the volume! It's trading more than 2 million shares a day! And look at its price! You can't beat movement and price like that. Why, it's up over 200% in just a few days!"

Hearing this really excited Fred. "Wow, 200%? That's great, right?"

"You betcha, Fred," Pete sneered with quiet delight. "And it's moving fast. We need to climb on board, and we need to do it now!"

Fred looked the stock up in the newspaper and saw that it had a P/E of 102. He wasn't sure, but such a high number had to be good. He began thinking fast and furiously. Fred knew he should be asking questions. He tried to recall some of the things he'd heard on the news. "What's their debt like?" he finally blurted. Fred assumed if the debt was fairly high, that would mean they had good credit. He also knew he should ask what their cash situation was, but with good credit, who cared about cash?

Pete was surprised by this question. He was used to his clients' accepting his word, no questions asked. However, with all the information now available, it was getting harder and harder to keep customers from thinking for themselves. Now he actually had to provide answers. "But not necessarily complete answers," Pete mused.

"Not to worry, Fred. While it's true they have a bit of debt, their market cap is over $170 million, and with a market cap like that, why worry about their debt?"

"Well, that sounds reasonable", Fred thought. "But something still seems wrong. What does the market cap have to do with the debt? I think I'm missing something here, but... probably nothing important. I know I'd be able to think better if it wasn't for all that jingling. Now, if...." Jingling? Huh?

Fred looked around, and right behind him stood Motley Fool, all decked out in his Fool garb, replete with jingling bells.

"Hi Fred! I'm Motley Fool. I'm here to help you think this through. I'd like to point out that Pete's line of thinking is faulty. If a company has high debt, there are other numbers you should be looking at. You'll need to know the company's working capital too. The market capitalization is the price per share, multiplied by the number of outstanding shares. It's what the company is worth on the open market, but it doesn't tell you anything about how well the company is doing. You really need to get a better picture of how much money the company has to work with."

What figures are missing before Fred can get a better picture of the working capitalization?

1) the current cash, cash equivalents, and assets

2) the number of outstanding shares

3) the current percentage of insider holdings

4) the current earnings estimates per share

Enter your selection in the field to the lower right, and get immediate feedback on the answer!

Answer: #1

Fred stopped to think for a minute, now that the Fool stopped his infernal jingling. How are they to pay back the debt? How much does this affect their bottom line of assets? He thought, "Gee, I think I need to find out what the assets are so I can decide if they have the means to repay their debts."

"That's right Fred," the Motley Fool chimed in. "Before you can decide if a company is worth buying, you need to see how they manage their finances, and whether they've balanced what's going out with what's coming in. To do that, you need to know both sides of the balance sheet; both the assets and the liabilities. While you do have an idea how the debt stands, you'll also need to balance that with where the assets stand. When you have those figures, only then can you calculate the company's working capital. This will let you know what the company has available to keep it moving forward. Without working capital, a company can't make acquisitions, further R&D, hire new employees, or make any other forward-looking moves without incurring more debt. Not a great place for a new company to be, now is it?"

"Thanks, Fool! You're a life saver! I almost bought into this nonsense!"

Virtually forgotten by both Fred and the Fool, Cold Call Pete sat holding his phone and fuming. "Someday I'll get you for this, Motley Fool," he muttered to himself. "Someday...."

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