Maybe it goes to 2 in 2010.

That was a bit of a diversion.

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

This is 2009 estimates.

And B is expected to make 4 per share.

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

It was 10.

So it has a Price to Earnings of 50.

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

One is, you could kind of flip this.

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

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

So let me switch colors just to ease the monotony.

But this could happen.

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

It's just a faster way of saying

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.

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.

looks neutral.

So based on that, this looks cheaper.

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

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

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

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

So in 2013 you'll be making 16.

So something very interesting is happening.

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

(Laughter)

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

Low Price to Earnings ratio implies that it's cheaper.

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.

And we touched on that in the first video when we talked about bank accounts.

I can do a Price to Earnings on my bank account.

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

And if you want to look at earnings per share, EPS, is this number divided by the number of shares was 0.35.

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.

But one of the things that we always tend to confuse is the difference between a revenue model and pricing.

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

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

Price to Earnings ratio.