Ok, so lets assume we have two businesses, Company A and Company B. The prospects for both are good, they growing at the same rate of 20% and are both generating earnings of $2. The difference is i can purchase Company A for $1.5 and Company B for $1. You buy Company B as your paying less for the same prospects and the same earnings.
Now lets assume there is also another company, Company C. The prospects are excellent and its earnings are expected to double from $1 to $2 and you can buy these earnings for $1. You should still buy Company B becuase its earnings are still higher per dollar paid despite C growing faster. The time value of money dictates that I want more money now, not more money later. Depending on continued growth rates and changes in price you can determine whether you want to switch in future years.
In your example, if I could buy the company with 50c of earnings for 10c and the company earning $2 for $1. The one earning 50c is still better as im paying 20c per $1 of earnings compared to 50c per $1 of earnings. Id get a 500% ROI compared to a 200% ROI.
ALU Price at posting:
$12.83 Sentiment: Buy Disclosure: Held
