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'Mad Money' Mailbag: Short-Term vs. Long-Term Debt

Editor's Note: The following are questions received from viewers of "Mad Money," seen every day at 6 p.m. EDT on CNBC.

What is the difference between long-term and short-term debt?

-- Darren from Maine

James J. Cramer: By definition, the principal amount of short-term debt is due within one year, while long-term debt is due at least one year out. In general, all debt levels should be compared against those of a company's peers.

The best way to measure how well a company can cover short-term debt is by using the current ratio, which is a company's current assets divided by its current liabilities. This ratio should be at least 2, and more than 4 for more conservative investors.

Long-term debt should rarely account for more than one-third of total assets.

What is your take on Honeywell(HON - Get Report)?

-- Dave from New York

Cramer: I like Honeywell the company, but am a bit more cautious about Honeywell the stock. That's because I recognize that the Federal Reserve is dead-set on slowing this economy down through a series of interest rate hikes, and I don't want to be long any cyclical stocks when this slowdown materializes.

What do you think about JDS Uniphase(JDSU) and Oracle(ORCL - Get Report)?

-- Eric from Florida

Cramer: I would be a seller of JDS Uniphase because it is too speculative for me. And I believe Oracle's stock will be dead money until Larry Ellison, the company's famed CEO, leaves his post and the company can focus on operating improvements rather than acquisitions.

What happens to a stock when one company buys another? For example, what do I receive as an MBNA(KRB) shareholder from this Bank of America(BAC - Get Report) offer?

-- Carl from Sacramento, Calif.

Cramer: Takeover offers are generally made in cash, stock or a combination of the two. In the case of MBNA, pending shareholder approval, BofA is offering investors $4.125 a share in cash plus 0.5009 BAC share.

At the time of the deal, the offer was worth $27.50 a share, but that figure will fluctuate along with Bank of America's stock price. That said, there is often a collar on stock deals like this; in this case, it would provide MBNA shareholders with downside protection should BAC's share price drop considerably.

I have about $60,000 in my portfolio, and try to own eight to nine stocks at one time. Is that too many names for this size portfolio?

-- Bob from California

Cramer: No, I believe that you are well within your means by using this strategy. In general, I believe that folks should invest at least $1,000 or $2,000 in each stock in their portfolio in order to keep transaction costs relatively low. Otherwise, individuals will want to focus on mutual funds.

I recently bought Encore Acquisition(EAC - Get Report), which has since moved higher and just announced a 3-for-2 split. Should I sell before or after the split?

-- Tim from Florida

Cramer: A stock split does not affect a company's fundamentals one bit, and should not be a factor in buying or selling decisions. If you owned 300 shares at $45 each before a 3-for-2 split, you'd hold 450 shares at $30 each afterward. Either way, your stock would be worth $13,500.

Jim always says on the show that we need to "do our homework." What are his favorite places to find information?

-- Frank from Pittsburgh

Cramer: First off, I read a stack of a dozen daily newspapers each morning, everything from The Wall Street Journal and the Financial Times to USA Today and The New York Times. I also scour many Web sites, most notably and its subscription products. Most important, however, I have hundreds of industry and market contacts with whom I'm in constant contact.

Interested in more Cramer? Check out Jim's rules and commandments for investing from his latest book by clicking here. It's a series of articles from Cramer on how to become a better investor. The following table lists some of the rules that Cramer dissects.

1. Pigs Get Slaughtered 2. It's OK to Pay the Taxes
3. Don't Buy All at Once 4. Buy Damaged Stocks
5. Diversify to Control Risk 6. Do Your Homework
7. Don't Panic 8. Buy Best-of-Breed
9. Defend Some Stocks 10. Don't Bet on Bad Stocks
11. Own Fewer Names 12. Cash Is for Winners
13. No Regrets 14. Expect Corrections
15. Know Bonds 16. Don't Subsidize Losers
17. No Room for Hope 18. Be Flexible
19. Quit When Execs Do 20. Patience Is a Virtue
21. Be a TV Critic 22. When to Wait 30 Days
23. Beware the Hype 24. Explain Your Picks
25. Find the Bull Market
Check back for more of Cramer's Rules

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JDSU $6.51 -2.40%
BAC $14.55 -1.60%
EAC $1.50 -1.30%
HON $114.29 -0.29%
ORCL $39.87 -1.10%


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