between passenger and freight earnings, the diversity and density of freight traffic, and passenger and freight rates should be examined. The reputation of the management for ability and integrity should be considered. Gross earnings run from about $3,000 to $40,000 per mile with the average $10,460.

(5) Net income per mile. Net income is obtained by subtracting from gross earnings operating expenses (and sometimes taxes) and adding to the net earnings so obtained whatever income from other sources the railroad may derive. This is a very important figure. As with gross earnings, the reports should be examined to determine whether net income is on the increase or the decrease, and it should be compared with the net income of other railroads occupying the same field. It involves a criticism of operating expenses. The payments of the railroad must be analyzed to determine whether the proper sums have been expended for maintenance of way, replenishment of rolling stock, and other improvements sufficient to keep the road in good physical condition. Normally speaking, operating expenses should absorb about 65 per cent of gross earnings. If it is found that a railroad operates for 60 per cent, however, it does not always follow that its operating officials are exceptionally efficient, so that the cost of conducting transportation is relatively small; it may mean that the physical condition of the property is being neglected, or that ordinary improvements, which should be charged to maintenance, are being paid for by increase in capitalization. It is very important for the investor to find out which is the case. If analysis leads to the suspicion that the earnings result from neglecting the property or capitalizing every trivial improvement, the railroad's bonds should be rejected. Net income varies from $1,500 to $12,000 per mile, with an average of $4,702.

(6) Fixt charges per mile. The fixt charges of a railroad include interest on its bonds, rentals, and taxes (when the last-named are not reported with operating expenses). The importance of this figure lies in its relation to net income. If a railroad does not earn well over double its fixt charges, its obligations can not be regarded as in the first investment rank. Of course, when a railroad earns more than twice the interest requirement upon its entire bonded debt, it is probable that some of the underlying bonds are protected by three, four, or five times the interest requirement upon them, and their position is correspondingly strengthened.

The foregoing analysis applies particularly to mortgage bonds upon the general mileage of a railroad and not to such special issues as collateral trust, terminal, bridge, or guaranteed bonds. It will not be necessary, however, to lay down any rules as to these classes of bonds, for the general principles outlined above, with slight modifications of detail, will be found equally applicable to a judgment of their value. Equipment bonds, on the other hand, owing to their want of similarity to any other railroad issues, will receive separate treatment later.

It is of interest, in view of the present diminished confidence in railroad securities, to advance certain considerations touching upon the safety of railroad bonds in general.

The last published report of the Inter-State Commerce Commission, year 1906, furnishes interesting testimony on this subject. A table on page 60 shows that the total railroad capital of the United States for that year was $14,570,421,478, of which $7,766,661,385, or 53.31 per cent, was in the form of bonded debt, and the rest in capital stock.

These figures indicate a substantial equity, but are somewhat misleading because they refer to par value. A fair estimate of the market value of this stock equity, which is the margin of security in the properties from the bondholder's point of view, can be obtained from a table on page 82, which shows a balance available for dividends, after paying all operating expenses and fixt charges, of all the railroads of the United States for the year ended June 30, 1906, of $457,060,326. This amount is equivalent to nearly 7 per cent upon the total par value of the stocks.

Estimating that a railroad stock should earn 10 per cent upon its market price—and even the most prejudiced will admit that a stock earning 10 per cent is worth par—the total market value of American railroad stocks would be $4,570,603,260, or more than half the par value of the bonds. In other words, the bonded debt would represent something less than 63 per cent of the total market value of the property. This compares favorably with the security of first mortgages upon real estate.

When the safety of interest is considered, the showing made is equally strong. Page 82 of the report above quoted shows that the net income of the railroads of the United States for the year ended June 30, 1906, after payment of all operating expenses, was $848,836,771, and the total fixt charges, including interest on bonds, interest on current liabilities, and taxes, amounted to $391,776,445, leaving a balance available for dividends of $457,060,326. It is apparent, therefore, that the net earnings of the railroads of the United States, considered as one system, could be cut in half without affecting the payment of interest upon the railroad's obligations. This affords a large measure of protection.

The following analysis shows that the actual market value of the railroads is probably greater than the estimate made above.

The table shows the percentage of bonded debt to total market value of some of the more important railroad systems. Two trunk lines in the East, a north and south line in the middle West, and two transcontinental have been chosen. No attempt has been made to select railroads which would make a favorable showing. Indeed Pennsylvania, and Union Pacific, by reason of their recent heavy bond issues, probably compare unfavorably with others which might have been chosen. The figures showing the par value of bonds outstanding have been taken from last annual reports, with additions made for recent issues. The figures showing the market value of stocks are based on the amounts outstanding April 1st, 1908, at the market price.

In view of the enormous decline which has occurred in railroad stocks during the past eighteen months, the showing above is truly remarkable. It is plain that the entire bonded debt of any of these standard railroads is less than 60 per cent of the total market value of the property, while in the cases of the Pennsylvania, Great Northern, and Union Pacific, more than half of the present market value of the property could be erased before the lien of the bonds least well secured would be impaired.

Of course,