The hubby just guzzled the last of the orange juice (strangely enough there is no dirty glass in the dishwasher) so I head to the grocery store to buy more. Standing in front of the orange juice section, cooling my heels literally, I see a 128oz jug of Minute Maid Orange Juice for $5 (actually $4.99 but lets make it simple). I also see a 64 oz carton for $3. The hubby drinks a lot of orange juice (extra, extra pulp – he’d be happier with full rind) so I, of course, want to get the best deal.
What do I do?
Simple. I figure out the price per ounce.
Jug = $5 divided by 128oz = 3.9 cents per ounce
(if only powering my car was so inexpensive)
Carton = $3 divided by 64oz = 4.7 cents per ounce
If I didn’t care whether I bought in a jug or carton, then I would pick the most inexpensive option, the 128oz jug.
(Note: Most grocery stores have the per unit cost on the shelf tag to make it even easier)
With stocks, there is a very similar calculation called the price-earnings ratio (also called the price multiple).
When I buy a stock, I’m buying a piece of the company. And as an owner, I own a share of all future earnings (these eventually get paid out in dividends). It makes sense that if the company earns more money, then the stock should be worth more.
To easily compare different share prices, I calculate the price-earnings ratio. It is exactly as it sounds…the price per share divided by the earnings per share. Lucky for this lazy gal, I don’t usually have to calculate the P/E ratio. It is given to me with my other stock information (even Yahoo! Finance supplies it).
I can look at the P/E ratio for that company and compare it to its past P/E ratios and the P/E ratios of the other companies I’m looking at. Is the P/E higher or lower? Normally, the higher the P/E ratio, the more expensive the stock is.
Normally because the P/E ratio is based on the past year of earnings. If I expect the earnings to increase, then I expect the P/E ratio to be higher. If I expect the earnings to decrease, I expect the P/E ratio to be lower.
Comments (3)
Great post K- I just thought I'd mention that it's usually men who prefer big jugs...
Posted by prlinkbiz | August 24, 2006 1:52 AM
Posted on August 24, 2006 01:52
very helpful indeed, I need to get this in my head.
I just told my teenagers- the teacher i took economics from in college was from texas, and was mono-toned- so I never could keep myself awake enough to learn this stuff at the tender age of 18 or 19 - yikes. So I am now craving the knowledge you ladies are supplying.
Thank you very much. I posted and linked to you yesterday too- 9 though I don't have as many readers as some bloggers.
QT
Posted by queue_t | August 24, 2006 1:00 PM
Posted on August 24, 2006 13:00
QT,
I think for a teacher to be truly great, she should have a passion for the subject.
Your former prof was likely teaching the subject for the money, not out of love (if she loved investing, there would have been no way you'd fall asleep).
PR and I LOVE investing. We wouldn't have started the blog if we didn't.
When I get asked the question "What would I do with a million dollars?", my answer is a very excited "I'd invest it in this and this and this stock."
And why do we love it? Because its fun. It really is. Of course when we first started, it was a bit scary (that's why I started slow, investing in money market funds). But once we figured out the basics, it became fun, like a game where if we know the rules, we can't really lose!
Posted by Kimber | August 25, 2006 8:17 AM
Posted on August 25, 2006 08:17