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

So let me switch colors just to ease the monotony.

This is really important to pay attention to, because so many people say, oh, a company made this much.

We are assuming a very simple world, were the is no taxes, we have no debt, we have no intrest or things

And when people talk about earnings of a company, this is what they're talking about.

Are you with me?

It's just a faster way of saying

So in 2013 you'll be making 16.

looks neutral.

Maybe it goes to 2 in 2010.

So a plus b have to be equal to 50.

Profitable.

One of the viewers pointed out not incorrectly that one definition of return on asset so this whole video's going to be on return on asset that one definition of return on asset, and if you look it up on some of the finance sites or even some finance textbooks, they'll tell you it's net income over total assets.

That was a bit of a diversion.

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

The price here, Company B was more.

And at least it'll give you a sense of how revenues, gross profit, operating profit, pre tax income and net income really are different.

This is 2009 estimates.

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

Maybe Abby made 50 and Ben earned 0.

And we can eyeball it right here.

Because when someone says earnings, are those the earnings last year?

And B is expected to make 4 per share.

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

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 here you see it means very, very different things.

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.

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

It was 10.

So it has a Price to Earnings of 50.

Company A made 1 per share. 1 of EPS.

And you might wonder, where does that come from?

Everything on this line would be a valid combination of

Minus 500,000.

So let's look at them over the course of one year.

So notice.

Invest financial assistance, but also management assistance.

Our interests clash with theirs.

But in general if you take EBlT and you take out the non operating income, you get back to operating profits.

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

This is what the owners of the company get before they pay the government.

(Laughter) But I know it's the bottom line, or one's perception of it, that motivates people in the end.

Let's compare EBlT to operating profit.

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