Valuing a Company What determines a companies worth?

What is company worth? Company ACompany B

2 Goals of a Company 1) Maximize Profits (each year) 2) Grow Profits (over time) have the best stock performance Companies that grow PROFITS the fastest

What is a P.E. ratio? Price to Earnings Ratio = [Price of Stock / Earnings per Share] Stock Price = 20 Earnings = 2.00 per share Price to Earnings Ratio : 20/2= 10 P.E.

Growth Rates Investors care about how FAST companies can GROW profits P.E. ratios reflect GROWTH rate expectations The HIGHER the P.E. => the FASTER the market expects Profits to Grow

High & Low P.E.’s SP500 Average = 15 P.E. Below 10 P.E. => considered low –Called a “value” stock –Generally, less risky Above 35 P.E. => considered high –Called a “growth stock” –Generally, more risky

SP500 Average PE is 15

Analysis of 2 Companies About Company

Analysis of 2 Companies About Company Current P.E. Current Market Cap: Profits per year