Price to Earnings.

Price to Earnings ratio.

So 10 price to earnings.

Price to Earnings of 10.

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

Price to Earnings is 1.75 divided by 0.35, would now be a 5 Price to Earnings.

So based on 2008 earnings, the price to 2008 earnings for

Higher Price to Earnings in Company B.

The Price to Earnings ratio is equal to the price so 3.50 divided by the earnings per share.

The Price to Earnings ratio is the same.

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.

So what are their respective Price to Earnings ratios?

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

They'll say, this is 100 Price to Earnings Ratio.

So it has a Price to Earnings of 50.

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

The price to 2008 earnings for Company B is 4.

We now know how to calculate the Price to Earnings ratio.

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.

The average Price to Earnings ratio in the market right now

So in this case, the Price to Earnings ratio is 10.

The Earnings to Price ratio is just the inverse of this.

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

For the same earnings you're paying a lower price.

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

So now if you do a Price to Earnings on 2010 earnings so this is 18 months out from when this video is being made all of a sudden, your Price to Earnings relative to 2010 earnings is 4 for Company A.

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

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

But when you look at the Price to Earnings ratio, you say

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

I mean, companies go from a 10 to a 5 Price to Earnings.

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

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

You want to have a lower Price to Earnings ratio for the same asset.

Well, for Company B, it's a Price to Earnings 20 divided by 4.

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?

And that's important because Price to Earnings really is more of a relative valuation.

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.?

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

And why someone's willing to pay a 50 Price to Earnings essentially for a bank account.

So first, just to learn what the Price to Earnings ratio is, let's just calculate it.

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

And then we're looking at a 6 and change Price to Earnings, which is downright cheap.

Or if you do the Earnings to Price, if you do 2 100, you get 2 .

Then all of a sudden the Price to Earnings ratio is starting to look a little bit better.