Videos: Insights into stock market finance

From the Kahn Academy: Introduction to the Income Statement : The income statement, revenue, gross profit, operating profit, net income,

Good stuff from the Kahn Academy: Take 2 identical businesses (a pizzeria in this example) which generate identical earnings..... however, 1 of the businesses has high bank borrowings. See what happens if you apply the same PE to the 2 businesses....

Hi, interesting food for thoughts, check out the comments posted on the orginal youtube, I agree that there might be some simplistic comments on this calcaulation
Also
was reading this book, show me the moneyvol.4, by Teh Hooi Lingafter some time, and realise a lot of articles which I couldn't really understand some years back seem more digestable now.
There is a particular interesting article, regarding looking at just revenue growth at face value, which also affect PE, doesn't tell the full picture whether if an company is value creating or value destroying. SHe mention in her book the ROIC, amt of capital invested to generate that revenue must be taken into consideration, otherwise the faster the company's revenue grows, the faster the destruction of value for sharesholders. I have not been able to apply that study to the stocks i am holding, yet dur to my work constrains but just to share to all forummers, Iand I hope to be able to share with my findings in the next few weeks, may all of you make money in both bull and bear markets
 

What the examples in the video illustrate is that one should not consider P/E without also considering book value. The company in debt in the example obviously must have a book value of about 10% that of the company with no debt.
If 2 companies are producing the same earnings, but one has book value that is 10 times the other, and yet the stock prices of the 2 companies are the same, you would naturally consider the company with higher book value to be better value for money.
However, this scenario of the 2 companies producing the same net profits is also very unlikely because the company with debt (up to 9 times its equity!) would likely have to make huge debt repayments every month/quarter, significantly bringing down the net profits, even if the revenues for the 2 companies are the same. Anyway in a real life scenario, it is unlikely that a company will be granted such a huge loan/debt relative to its equity.
To further illustrate the point on book value with a simple example, say 2 companies have book values of 100 million, both consisting of idle cash of 50 million dollars.
Both companies then produce net profits of 10 million for the next quarter. Company A uses 5 million dollars of its cash in the process of generating its 10 million dollar profit. Company B uses all 50 million dollars of its cash in the process of generating its 10 million dollar profit.
If both have the same market caps at this point, they will have the same P/E, at least for the last quarter. However, at the end of the next quarter, company A’s book value would be 100-5+10 = 105 million whereas company B’s book value would be 100 – 50 + 10 = 60 million, a decrease in book of 40% as compared to the previous quarter.
Obviously, company A would appear to be of better value for money at this point, assuming the same stock price. Therefore it is important to consider both P/E and book value.
Eratat Lifestyle for example, is trading at a P/E of under 3, while its current price values it at merely 0.6 of its present book value. 

Thanks ethan999 for your comments.

Here's another good one from Kahn Academy: When would it be sensible to pay a higher PE, and why is PE of 10 a fair valuation for stable non-growing businesses. Enjoy!

A primer on income statement -- and also how to derive ROA and ROE - from Kahn Academy.