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  • Writer's pictureIshfaaq Peerally

Investing For Beginners: Revenue, Earnings and P/E ratio

You always hear about revenues, earnings, earnings per share (EPS), P/E ratio. What does all of this actually mean?

Revenue is the total money coming in a company.

Fortune 500 is a list of companies by revenue. Walmart has the highest revenue with $500 Billions followed by Exxon Mobil, Berkshire Hathaway, Apple and Mckesson.

However, revenue is not equal to profits. Walmart, for example, has a small profit margin and its earnings is only about $10 Billions. Earnings are actually profits.

The most profitable companies in the world are Apple with $64 Billions followed by Berkshire Hathaway, JPMorgan Chase, Wells Fargo and Bank of America. The big tech companies Google, Amazon, Microsoft and Facebook make very little money compared to Apple. In fact, Apple makes more money than all of them combines.

One way that earnings can be useful to us is by calculating the earnings per share(EPS). Then we can calculate the Price to Earnings ratio (P/E ratio)

It is important to understand that the P/E ratio varies from sector to sector and historical P/E ratios should also be taken into consideration.

P/E ratio doesn't tell us everything about a company since it doesn't take into consideration growth.

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