Compounding Snowballs

I know the image doesn’t say the words Earnings anywhere. As an investor, you look at the value of the company. The company’s value is based on their Earnings. And that is why it says value and is still related to P/E Ratios. The first thing you need to know about P/E Ratios is what P and E stand for. P stands for Price and E for Earnings. Therefore, P/E is a Price to Earnings Ratio or to put it in another way, Price divided Earnings. A P/E Ratio calculates how much you will have to pay to get a dollar of the company’s earnings. If Mattel’s(MAT) P/E Ratio is 31.3 that would mean when you pay $31.30 you would get a dollar of Mattel’s earnings. Here’s how to calculate it. As the metric clearly states in the name you divide the company’s Price share by their Earnings per share. I use Morningstar for my stock research. First, you need to find the Earnings per Share, that is located on the Key Ratios page. Mattel’s Earnings per share is $1.02 and their Price per share is $31.97, ...

My third post is going to be about Dividends. As we talked about in my first post, Compounding Snowballs , Dividends are very important to compounding. When I first learned about Dividends I only cared about two things, when I would get paid and how much. I can give you answer to both. You usually get paid four times a year, every quarter or once every three months. To figure out how much let’s use another Lemonade Story. Farhang and his wife Kristin are both interested in becoming shareholders of the lemonade stand. Lily and Sara created four shares. Each member of the family gets a quarter of the lemonade stand. Kristin wants to know after investing, how much will she get as a dividend? Lily and Sara tell their mother that they will pay 40% of their earnings as a dividend. Meaning each shareholder will get 10% of their profits. Farhang was confused by this metric so he asked his daughters to explain their reasoning. “There are four shares sold. To become a sharehol...