Money Making: Finance And Life. Part 2

Sometimes wild trading at a stock exchange or sharply increased expectations can introduce the corrective amendments in objective calculations, but as a result any business will cost no more that money which he earns. Whether it is an old-fashioned image, selling goods produced at factory, and being engaged in service, or doing the same through the Internet, using again created trade mark and the huge clientele involved with bright idea.

You asked a question why all investors are so anxious about so-called P/E ratio (a share price ratio to incomes per share)? Certainly, many of you repeatedly used this coefficient at the decision on share purchase or heard about it from the broker. However, why P/E ratio, instead of a price ratio to trade inventories, or the prices to sales? Both coefficients (as well as many other things) settle payments by preparation of the balance statement and they can be found in any financial documentation easily.

The answer to this question is very simple. The reason consists in that the price/income (P/E ratio) shows coefficient, how many years is required to the investor for return of the enclosed money at current level of profitableness of the company. Everything is neither more nor less. For example, at P/E ratio, equal 10, 10 years to earn that money is required to the company, which their shares stand today. At the coefficient equal 20, – term increases till 20 years and so on.

Certainly, these calculations are true only in the event that level of incomes of the company remains invariable. If the company increases the incomes by 40 % annually, calculation becomes more difficult as it is necessary to consider predicted growth. Many professionals use for this purpose idle time “a gimlet rule”: P/E ratio shouldn’t exceed annual growth of incomes of the company. It means that at annual growth of profitableness in 40 % coefficient P/E equal 40 or more low can be more or less defensible. As a result huge value is acquired by an estimation of annual growth of profitableness of the company.

Recently we often become witnesses of how the price for shares even the large and solid companies falls on 25-50 % in a few minutes. It occurs because company management more often or analysts of investment firms report about change in an estimation of the future growth of sales or company incomes.

It would seem that it has changed if the growth forecast has decreased with 30 to 20 %? It has changed very many! Using an aforementioned rule, defensible coefficient P/E has decreased with 30 to 20, i.e. for 33 %. Accordingly the price of shares of company too should fall to 33 % correctly to reflect changed realities. Sometimes the price at a stock exchange falls much more. It can be the good indicator of that it is time to take the fallen shares in hope that their price as a float should return to an equilibrium state.

It is very crucial that government, despite this crisis is not abandoning to help small businesses. And small business grants can be a true helper today.

But, of course, you should remember that today the fight for small business grants as well as for other types of grants is harsher. This is natural – more businesses need them. So before you start your fight for the small business grants, please make sure to check out this blog for more info about grant industry.

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