Reprinted from March of 2008
This is an essay....it may be too serious for some, so I want to stop you right here if your not in the right frame of mind. When I was driving to Grosse Pointe the other day two concepts crossed my mind on the long drive...one was ROI (and I have covered this topic in a few recent blogs), but I still owed you my thoughts on PE ratio, and so here it is....( at your own risk)
PE ratio..the definition?
The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios. The reciprocal of the P/E ratio is known as the earnings yield.
....lifted from the wiki http://en.wikipedia.org/wiki/PE_ratio
What? Fine and dandy if you're a publicly traded company and what you are doing is serving Wall Street....but where in this definition is the word 'people', whether it be 'customers', 'employees', or your 'local community'?....where is the word 'service' or 'quality'? It is blatantly missing...Oh yeah, I understand that all these things are built into the numbers and should be a reflected in the final results.
But this is where I think things get lost....Are profits important? Absolutely! It is a measuring stick of success in a capitalistic society....In any good company; profit is a reward for performance.
So if profit is a the reward for performance...then profit itself cannot be performance, only the reflection of. I think some companies out there have lost their way...because they became focused on profits and not on the performance that produces profits.
So what is the performance that produces profits....well in my opinion it begins with people...and the investment into those people...this investment is evenly distributed between employees, customers, and the community you live and work in. If a company does not put a hyper conscious effort into each of these areas it will fail....it will be a charlatan, it won't be believed or respected, or returned to....
In the end it takes a person to sell and it takes a person to buy, and if a company does not invest in both sides of that equation....then simply put, there will be no buyers and no sellers for that business.
Is the product important? Yes....but I think that almost goes without saying. Whether the product be a service or a widget....or some combination of both...without a person nothing will happen. People or even a single person is what makes the difference. Think about it? Think about the last time you went out to eat, or went to the mall, or were in any retail transaction....think about one that you can remember...one that you can remember that was a good experience. I bet you can pin that good experience directly to an interaction with a person....with a personality....and I bet you considered that a 'positive' experience.
We absolutely crave positive experiences, but generally they are very hard to find....but when we do, they impact everybody and it becomes contagious. The 'giver' feels good, the 'recipient' feels good, and they in turn spread that positive energy.
This then leads me to what I actually think PE ratio should be....it should be the Positive Energy ratio. I know, I know.....it sounds a little 'new age' and 'spiritual'.....but I come to this conclusion from honest experience. I have asked myself...why does one business grow when others falter? I can see similar products and services, I can even see that there is an investment in people, but what is the 'x-factor', what is the variable that really sets one business apart from another. I'm telling you...it's the Positive Energy....even within our own system, those operators that have a higher P/E ratio...inherently do better....by leaps and bounds.
You can have all the tools, all the mechanisms, and all the people...and it simply won't be enough. Have you ever heard the words 'smile....it's contagious'? It's true, and that’s what I am getting at here....Positive Energy output...begets positive results, conversely Negative Energy output begets negative results. Think about it this way...Think of Newton's 3rd Law of Motion...
Third Law.... Whenever a particle A exerts a force on another particle B, B simultaneously exerts a force on A with the same magnitude in the opposite direction. The strong form of the law further postulates that these two forces act along the same line.
This law is often simplified into the sentence "Every action has an equal and opposite reaction".
Let me say it again this way...."Every positive action has an equal and opposite positive reaction" ...that's right your Positive Energy will come right back to you....and if one uses that positive energy on employees, and customers, and community....it will all come back....and when it does, that's when you will find a profitable company....with a good PE Ratio!
Sunday, March 29, 2009
Reprinted from March of 2008