Blowing the Lid off the Biggest Scam in Big Business
Let’s get back to basics. When you buy a company’s stock, you are literally buying a ‘share’ of that business. You own a piece of the company, and so have a right to a share of the profits. For simplicity, the profitability of a company is usually given as ‘earnings per share’ (EPS), which is the net income of the firm divided by the number of shares outstanding. It’s usual for some of a company’s earnings to be distributed back to shareholders as dividends, and some earnings to be retained and invested into growth of the business. The ability of a company to grow and increase earnings into the future underpins the value of the firm. The expectation of investors for earnings growth is reflected in the ‘price-earnings ratio’ (P/E), also called the ‘earnings multiple’. The P/E is the share price divided by the earnings per share. A company in a traditional low-growth industry will usually have a lower P/E than those in a more glamorous high-growth sector. For example, as of January 2016...