Cramer's 'Mad Money' Recap: Demystifying Wall Street (Final)
An Important MetricCramer's next page in the Wall Street dictionary was all about the different metrics used to value a stock. He explained that when you buy a stock, you're actually buying a small sliver of that company's earnings. By owning a stock, he said, you're betting that either those earnings, or the multiple the market is willing to pay for those earnings, is going up.
Cramer said there's no magic to price earnings, or P/E, multiples. The price of stock is equal to its earnings times the multiple. That's it. Of course, both the earnings and the market's multiple on those earnings are always changing, but the formula remains the same.
The market is always drawn to growth, said Cramer, that's why faster growing stocks often fetch higher multiples than slower growing ones. To determine how fast a company can grow, Cramer said investors need to dig for clues in its quarterly reports.
Cramer said he's always interested in a company's top line growth, how much revenue it generates, as well as its bottom line profits. He said the markets always pay up for accelerating growth, growth that is speeding up quarter after quarter. Gross margins, the amount of every dollar a company turns into profits, is also another key metric to consider.