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May 26, 2008 – Comments (0)

John Mauldin has a good post that got my attention because he mentions profitability and valuation.  I've always thought valuing a stock price to sales is utterly stupid and it is because it says nothing about the profitability. 

The grocery business is an example of one that has to have enormous sales, but the mark up is such that the profitability is much less then say a clothing store.  The simplest example I can think of is two stores selling jeans.  Both sell them for $50 each where one gets the jeans for $25 and the other pays $40.  The one with the high costs of goods has to sell 2.5 times as much with no extra overhead just to keep up in terms of profitability.  I probably have to say something simlar about cash flow.  Who cares if there isn't enough "cash flow" left to make a good profit.

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