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The Zulu Principle: Making extraordinary profits from ordinary shares by Jim Slater

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3. Earnings, Growth Rates And The PEG Factor

The earnings of a company are the net profits after tax attributable to ordinary shareholders. If a company has earnings of 10p per share and a P/E ratio of 10, the shares would be priced at £1; with a P/E ratio of 20, the shares would be £2; and with a P/E ratio of 50 – £5. The annual rate of growth in earnings and the projected future rate of growth are the main factors which determine the multiple. The P/E ratio is the measure of how much you are paying for future growth and how much others have paid before you.

Earnings are the engine that drives the share price. If the engine fails or falters the shares will come down. The two charts overleaf show at a glance the close relationship between ...

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