The authors think an appropriate level of bonds, preferred stocks, and other securities preceding common stock is appropriate under certain conditions.
In a top-heavy capital structure, senior securities sell at a discount to account for common stockholders not taking all the benefits of equity return and return of capital.
In the stock market, opportunities could be found in common stocks of such speculative capital structures when prices have gone down a lot. However, a true low-priced stock is one that sells at a cheap level with respect to earnings, assets, or sales of the company.
The authors also point to the inverse relationship between profit per share and company output per unit of market value. A business with a large volume and higher cost can see a higher increase in market value if the price of the commodity it produces increases versus low-cost producers.
Mr. Graham and Mr. Dodd take readers through the examples of undervalued companies wherein assets are not true commercial operations. Rather major portion of the income is from cash, marketable securities, or other such assets.
Chapter 41 marks the end of income statement analysis and Part V of the book.
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