So let me switch colors just to ease the monotony.

It's just a faster way of saying

looks neutral.

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

So in 2013 you'll be making 16.

So you've probably heard not only the term earnings, you've probably also heard the term earnings per share.

That's still way more expensive than most companies.

So what they do is they just take your earnings number and you divide by the number of shares.

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

Now what's our mantra of this day and age I wonder?

And I think this is very obvious to you, but let me write that down.

The price here, Company B was more.

We know how much it takes to build our product.

Divided by 0.35.

Company is 10.

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

So this is trailing 12 months earnings.

Price to Earnings ratio.

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.

To figure out the cash from operations from actually how much cash the operations are producing.

But in this case, you literally just take the price of the stock and you divide it by the earnings per share.

So let's think about the Price to Earnings ratio of the company in question, this widget case study, I guess you could call it, that we've been dealing with.

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

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

And maybe this guy's even growing faster, so maybe they're being conservative by only giving this guy a 10 price to earnings.

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?

Why would someone ever keep their money in the bank at 2 or a Price to Earnings of 50, when they could have a Price to Earnings of 10 with Widgets Inc.?

Stock Chart

This is the book value for a share.

It's classic pump and dump.

And in this video what I want to do is close the loop and see how this relates to what we talked about in the first video, in terms of price per share.

But you say, no but these guys are growing so fast in 2011 they're going to make 4.

Anyway, I want to leave you there.

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

Our profit, once again, is 30,000.

My son has been successfully subdued, so I think this is a good time to learn about the Price to Earnings ratio.

Or if we just wanted to round to the nearest penny, since we're talking about selling something, this optimal profit, this optimal profit, will happen at a selling price of 23 and 30, 23 and 33 cents.

Stock investments do not always yield profit.

But here, the Price to Earnings for 2009 then becomes let's see.

How did the stock offering go?

And the equity holders get wiped out, the old equity holders.

They've never made money.

So growth is the other reason why you're willing to pay a higher Price to Earnings ratio.

Inherently, when you're talking about value, you have to take the price per share and you multiply it times the number of shares.

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