From the second point of view the value of the guaranty is much greater. The distribution of risk, as in the case of fire-insurance, protects the holder against loss in the event of a fall in the particular piece of property upon which he holds a mortgage, or even in a particular locality. It can not be said, however, that the records are yet sufficiently complete to form a conclusion as to what is a safe proportion between capital and surplus and outstanding mortgages. Further than that the guaranteeing companies, generally speaking, have been operating since their inception upon a rising market, so that their success hitherto has not been remarkable. Allowing for these drawbacks, however, the private investor, unless so situated as to give personal attention to the details of his investments, will probably do well to purchase his mortgages in guaranteed form.
V
INDUSTRIAL BONDS
Industrial bonds include the obligations of all manufacturing and mercantile companies, and miscellaneous companies of a private character. They form a class quite distinct from railroad bonds or public-utility bonds.
I. Safety of Principal and Interest. The safety of industrial bonds, in common with the safety of all forms of investment, depends upon the margin of security in excess of the amount of the obligation. In the case of industrial bonds the amount of this margin is not always easy to determine. Even when determined, the rule is difficult of application because a margin which may seem insufficient from the point of view of physical valuation may be satisfactory when considered as the equity of a working concern. The indications most to be relied upon in estimating the safety of industrial bonds are as follows:
(a) Value of real estate. The first point to be determined in considering the purchase of an industrial bond is the value of the real estate upon which it is a first mortgage. If the appraised value of the ground, irrespective of the buildings and machinery upon it, is greater by a substantial sum than the amount of the bond issue, the obligation is practically a real-estate mortgage. In such a case, while possibly "slow," i.e., secured by an assets difficult to realize upon—the safety of the bond can hardly be questioned. In judging a bond upon its real-estate value, it is not always safe to take the cost price of the land as shown by the company's books, because frequently the cost upon the books is artificially raised by payment having been made in securities whose market value is less than par, or in other ways. As stated above, judgment should be based upon the appraised value of the land.
If the bond meets this test satisfactorily, the prospective investor may feel reasonably sure that the safety of his principal is not in question, and may buy the bond without anxiety if it satisfies his other requirements. On the other hand, if the bond only partially meets this test, and it appears that some part of its value comes from plant and equipment and from the strength of the company as a working concern, then it is necessary for the investor to consider carefully several other factors.
(b) Net quick assets. The balance-sheet of every industrial company can be divided horizontally into two parts. Its assets are of two kinds—property assets, which are fixt, and current assets, which are fluid. Similarly, its liabilities are of two kinds—capital liabilities and current liabilities. It requires no very extended business experience to pick out the items which make up these totals. Plant and property assets are usually lumped together under the head, "Cost of Property." Current assets include inventories, bills and accounts receivable, agents' balances, marketable securities, and cash on hand and in banks—everything, in short, which can be quickly converted into cash. On the other side of the balance-sheet, capital liabilities are easily determined. They consist of the par amounts of bonds and stocks outstanding. Current liabilities comprise bills and accounts payable, including borrowed money, pay-rolls, and interest and taxes accrued but not due.