let me tell you about a little trick i liketo use to figure out the real price of a stock okay, this sounds like a sillyquestion right, because if you go to any financial website, the share prices are clearly listed. okay, quick question
apple original stock price, out of these three stocks, which one isthe most expensive and which is the cheapest? it turns out that if you just useshare price alone, it is really hard to answer this question
you first need to pull in some additionalfigures. the key ratio that most people like to use is called the p/e ratio. and that's computed by dividing the share price by the earnings per share over the last twelve months. so in this example you'll see that themarket is valuing both apple and dell at a very similar multiple but valuing procter and gamble at a much highermultiple. now i
find that the p/e ratio to be a little confusingand hard to understand so the trick i like to use is to invert it. take a hundred percent and divide that by the p/e ratio you getwhat's called the earnings over price ratio -- that's just one hundred over 8.8 in this case so the earnings over price ratio is a lotmore meaningful, i think, because it represents the return thatyou would have received if you owned the entire company. for example if you somehow bought all ofdell your return on the money
that you used to buy dell would have been10.1 percent. now, if you compare this 10.1 percent to other investment opportunities such as owning real estate or a savings bond,response it's might sound like a pretty good idea to buy dell. well, that's what michael dell must bethinking, because of exactly what he's trying to do. i hope you'll find this trick useful the nexttime you have to make investment decisions. remember to subscribe!
