Maybe it goes to 2 in 2010.

This is 2009 estimates.

And B is expected to make 4 per share.

That was a bit of a diversion.

Why wouldn't I just pour all of my money?

You're making 10 , and that's just to connect the dots.

It was 10.

So it has a Price to Earnings of 50.

So let me switch colors just to ease the monotony.

And let's say Company B made 5 per share. 5 EPS, Earnings Per Share.

Obviously a 6 Price to Earnings of 20 times 2013 earnings isn't as good as a 6 Price to Earnings of 2010, because earnings in the future aren't worth as much as earnings today.

And the earnings on the bank account in that year were 200.

But when you lower the Price to Earnings you are increasing the Earnings to Price.

And you're going to pay a lower Price to Earnings ratio if the company isn't growing.

One is, you could kind of flip this.

It's just a faster way of saying

looks neutral.

So you say, they both deserve a price to earnings of 10.

Anyway, going back to Price to Earnings, we calculated the

So a lot of people immediately will figure out the Price to

So in 2013 you'll be making 16.

And I think you already get the sense that the lower the

But this could happen.

So something very interesting is happening.

Price to Earnings, all else equal and that's a big thing all else equal, the lower the Price to Earnings, you're paying less for something.

Which it seems like a really good deal, because now the

So based on that, this looks cheaper.

So this is kind of a Sal special ratio, but it's a useful one to think about.

The price here, Company B was more.

If I'm paying 10 today for 2 of earnings in 2009, the Price to Earnings of 5 for Company A.

That's still way more expensive than most companies.

And the first one is that this whole idea about revenue stream, Steve, I get it.

It's hard to compare one Price to Earnings in one industry to another.

And that would happen very quickly in today's public markets.

Price to Earnings ratio.

Divided by 0.35.

So they both deserve at least a price to earnings of 10.

So that's a little bit of a taste of why someone might realistically, in this case, pay a higher Price to Earnings for safety.

Is it a license or subscription model?

So just when you look at it superficially right here, when you take Price to Earnings and actually just as a little aside, whenever someone says the Price to Earnings ratio is 10, or the Price to Earnings for Company B is 4, the first thing you should ask is, what earnings are you using?

Anyway, I want to leave you there.

Say hey, you should buy Widgets Inc, because it's only trading at a Price to Earnings of 10.

Because you're getting the same earnings for a lower price.

If it's growing 100 a year for 20 years, this is actually a very good deal.

Let's say that we don't know that they're truly equal.