Originally Posted by Doppel
Surely you realize some investors--for good reason--tolerate a very high pe because the company is growing fast
There seems to be a misunderstanding of what certain financial terms mean. Gross and net for companies is different than gross and net for personal income.
-Gross Income is how much you were paid before deductions
-Net Income is how much you took home
-Revenue is the total amount of money collected
-Gross Profit is how much is left over after including the operating costs of the business
-Net Profit is how much money is left after subtracting things like growth and research
If you're looking at growth, you look at assets and gross profits
. Example: say I run a restaurant. I decide to expand my business by opening a second restaurant. That year might be considered a net loss because it takes a lot of money to build another restaurant, but you can see on the balance sheet that my company's overall value went up and the gross profit was positive.
With that in mind, how is facebook doing? The company's profit margins are actually very good; they make several dollars profit for every dollar it costs to run the company. So that means I should buy, right? Not quite. You need to factor in share price. Google Finance says their gross profit for the first quarter was 0.78 billion, so that's about 3.12 billion gross profit per year. Now how does that compare to the company's market value of 68 billion? 68/3.12 = 21.8
PE ratio, still terrible. Do not buy this company.
Now compare that to another information company like Google.
Their quartly gross profit is 6.86 billion, so that's about 27.44 billion per year. The company's current value is 198 billion. That puts Google's gross PE ratio at 7.2
so it's roughly 3x better than Facebook.
I used Intel as the comparison in my other post. Intel's gross profit 51.6 billion earned/yr and the company is worth 129 billion. That puts their gross PE at 2.5. That's exceptionally good and it's still 10x better than Facebook.