Guide to Analysing Companies

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grade but subsequently have their credit rating down-
graded are known as fallen angels; those that are upgraded
are called rising stars. (See also junk bond.)
Hire purchase
A means of paying for high-value consumer goods such as cars
or televisions. At the point-of-sale the goods that the consumer
wants to buy are first sold to a financial institution, which then
rents them to the consumer. After the consumer has made a pre-
arranged number of payments (usually monthly) and paid a
small service fee, the goods become his or her property. The
rate of interest charged by the institution is usually higher
than the cost of a bank loan.
Low interest rates and the increasing use of interest-free
credit has undermined the market for traditional hire pur-
chase. During periods of low interest rates, manufacturers of
cars and other big-ticket items believe they can make more
money by subsidising the cost of credit in order to increase their
sales.
Historic cost
The cost of something on the day that it was purchased; its orig-
inal cost, as opposed to the cost of replacing it or its inflation-
adjusted cost. Accountants like historic cost because it gives
them a real figure to play with. It is not particularly helpful,
however, to say in a company’s accounts that the value of its
premises is the historic cost that was originally paid for them
(perhaps 100 years ago). Nor is it useful to know the historic cost
of wasting assets like computers or cars. More useful for in-
vestors when valuing a company is to know today’s value of a
company’s assets and what it will cost to replace those close to
the end of their useful life. (See also depreciation.)