Nintendo made $114M in profit from the WII alone in 2008 In 2008, Tesco made £3 billion in profit In the last three months of 2009, McDonalds made a profit of $1.22 billion In the last three months of 2009, Disney made a profit of $844 million In the last three months of 2009, Coca-Cola made profits attributable to shareholders for $1.54 billion
Put some back into the company Pay off debt Pay out dividends
Profits are a major indicator of how well a company is performing. If the profits are high, the company is doing well If the profits are low, the company isnt doing well
As a result, profits (earnings) are the main driver of share prices, so investors are very interested in them!
The P/E Ratio How can I judge if the stock is on sale by looking at its earnings? Price/Earnings Ratio = Share Price Earnings per share
The earnings per share are calculated at regular intervals and published. For the sake of argument, the EPS is fixed until the next announcement. Earnings do not change on a daily basis, but the share price does
With the EPS fixed, as the share price decreases, so too does the P/E Ratio The lower the P/E Ratio, the cheaper the earnings Thats the way to find the more valuable stocks…
Chelsea F.C. produced earnings per share of £0.54. The share price is £10.54 What is the P/E Ratio?
P/E Ratio:£11.54 £0.54 = 21.37 This means that the Share Price is 21 times Earnings
Pick ten stocks which offer the lowest Price/Earnings Ratios. Hold them for a year and sell them next year if they are still not offering the lowest P/E Ratio. (We choose a year so as to give the companies time to develop – too much chopping and changing incurs many transaction costs and doesnt allow the stocks to grow)
Know what to buy Stocks with the lowest P/E ratio Know why youre buying it They are offering the earnings at the lowest prices Know when you will sell Sell in a year if they are not offering the lowest P/E Ratio Buy a number of stocks Buying ten stocks to diversify Time Tested It has been time tested by many financial analysts