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I'm currently reading Benjamin Graham's intelligent investor. This is the first book I'm reading about stock market investments. In chapter 11 under bond analysis section it says:

The chief criterion used for corporate bonds is the Number of times total interest charges have been covered by available earnings for some years in the past.

I did not understand the meaning of this. I found the term "total interest charges" and "available earnings" confusing.

Can someone explain this ?

  • I suggest that you find something more current than The Intelligent Investor. It was written over 50 years ago, and the information available, analytical tools, and investment vehicles have changed drastically in the meantime. It’s a wonderful book, but definitely dated in its approaches. – Pete Becker Aug 21 at 20:49
  • @PeteBecker thanks a lot for your comment. Do you have any recommendation ? – Kamrul Khan Aug 22 at 0:19
  • For bonds specifically, I learned the basics at a one-day seminar organized by the American Association of Individual Investors. But that was twenty years ago, when they didn't have a flashy web site. I don't know what they're like these days. – Pete Becker Aug 22 at 12:42
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The chief criterion used for corporate bonds is the Number of times total interest charges have been covered by available earnings for some years in the past.

A bond is essentially a loan to a business. The more money the company has available to pay the interest the lower the risk for the lender. If it will take all the earnings to pay the debt, there is a big chance they will struggle to pay the debt. But if the earnings that are expected are many times the interest owed the more likely the company will be able to handle the debt load.

I found the term "total interest charges" and "available earnings" confusing.

"total interest charges" are the amount of interest the company has to pay related to the bond.

"available earnings" is the profits the the company expects to make minus other obligations they already have.

  • In short, this is not a situation that usually happens these days. Generally companies don't borrow money when they're profitable. – xyious Aug 21 at 14:54
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    @xyious -- it's quite common for profitable companies to borrow money. An extreme example is real estate, where everything is leveraged. On a more mundane level, companies borrow money because it provides capital without diluting equity. My investment portfolio includes bonds issued by Microsoft, which is certainly a profitable company. – Pete Becker Aug 22 at 12:37
  • @mhoran_psprep Thanks for the detailed answer. It really helped. – Kamrul Khan Aug 22 at 22:23

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