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Accounting Allah shmoop ups and downs There's one more key

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aspect to consider When accountants managers investors and other be

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encountering type people think about revenues Investors value Cos every

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minute during the trading day is stock prices move up

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and down For most investors the standard valuation metric is

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just earnings profits But many companies go through periods of

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time where they're not profitable at all That is there's

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a product revolution or their international markets that need to

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be built and expanded and they consume cash and earnings

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and opportunity Regulatory and other global events also take their

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toll And suddenly a company that earned a dollar eighty

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five share last year well this year loses a nickel

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a share It's so if a company with a billion

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dollars of revenue that for decades passed had produced fifteen

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percent per year net profit margins suddenly had negative profit

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margins for in two or three years Well how would

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Wall Street value this company when historically it's always traded

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at sixteen times earnings Only now there's no earnings is

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the company that I earned a dollar eighty five last

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year today worth zero after it lost a Nicholas Share

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would you have valued General Electric at zero in two

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thousand ten when it had lost money and its earnings

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line Because more or less numbers adjusted That is what

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happened And no you could not have bought the entire

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General Electric Corporation for less than the price of a

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lot But Wall Street looked past current earnings and found

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another metric upon which to value the company Investors used

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evaluation technique called multiple of revenues Yeah remember that one

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will It's that valuation metric that many Wall Street people

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attribute to companies in order to value them That is

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if you'll hear phrases like the paper and pulp industries

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a lousy industry for margins It's going through a transition

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But it should only trade at one times revenue when

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it eventually finds a way for robots to produce paper

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and actually shows a profit again Without unions and other

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venues Silicon Valley will produce the next IT girl software

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applications for company's growing revenues at well over one hundred

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percent a year in having no profits So the lazy

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person's attribution might be a phrase like this company should

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trade it ten times forward revenues Will the key point

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here is that the amount of revenues a company has

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is a very good proxy for what earnings power it

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may have in the future A company with one hundred

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million dollars in revenues in a comparably profitable industry might

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have a harder time earning eighty million dollars versus a

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company in the same industry with a billion dollars of

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revenue Okay so let's go through the mouth of the

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billion dollar revenue fifteen percent net margin company that's growing

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revenues and say six percent about its historical rate which

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happens to be in about three hundred fifty basis points

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more than GDP usually grows So the billion dollar company

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with fifteen percent margins produces by definition one hundred fifty

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million bucks in profits if that company historically has traded

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at sixteen times its net income line or sixteen times

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earnings well then if you apply those metrics here it

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would trade today for evaluation of about two point four

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billion Well assuming all else was equal I either wasn't

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something funky going on with dead or cash or dividend

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payments or lawsuits or other shenanigans based on these margins

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and multiples While this theoretical company should trade for about

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two point four times revenues we did there the two

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point four billion units a billion dollars revenues should point

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for that So that's the big magic in the revenue

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Multiple you'll hear about from lazy Wall Street people take 00:03:23.855 --> [endTime] it all with many grains of ah garlic salt

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