There are four financial ratios: profitability, efficiency liquidity and leverage. We will talk about these one by one. Let's first look at profitability. So suppose the profit of your company is one million dollars. Is it good? I guess it depends. If your revenue is two million dollars, it's extremely good, but what if your revenue is one billion dollars? Your company did very poorly. So the financial statements contain raw data and it's not easy to use these raw data for financial analysis. So that's why you need ratios. Ratios show financial relationships. Ratios are the key tool for drawing meaning from financial statements. Using ratios, you can compare ratios over time and you can compare your ratios against your competitors. Also you can compare your ratios with industry averages and you can compare ratios with what you projected. So now we are comparing Costco and Walmart especially P/E ratios. Let's first look at the profitability ratios. Profitability shows a company's ability to generate sales and to control it's expenses. They are gross margin or gross profit, operating margin, net margin, return on assets and the return on equity. First our gross margin is the ratio between gross profit and revenue. Costco's gross margin is 13.3% which is quite low even in its industry, but it generates and it's operating margin is 3.1% and net margin is 2.0%. So this shows that the company is operating very efficiently, because with a very thin gross margin, it still achieves a net margin of 2%. Two percent is not very high, but since its revenues is very big, its net profit is $2.3 billion. We should focus on its membership fees. It's $2.6 billion, so it's similar to its net profit. So for the business of Costco, membership fee is very important and so membership renewal rate is very important. Costco's renewal rate is over 90%. Return on Assets is the ratio between the net profit and total assets. While the ratios of a profitability, usually it's better if it's higher, but if ROA (Return on Assets) is very high, it might mean that the company is not renewing its asset base for the future. So it's not investing in new facilities and equipment. In the case of Costco, it's 7.2%. Return on Equity (ROE), is the ratio between the net profit and shareholders equity. The outside investors are very interested in this number, because they want to know, how much net profit their investment can generate? In Costco's case it's 19.3%. Here we compare the profitability ratios of Costco and Walmart. The Walmart has a higher gross margin and net margin is 3.1% and very close, Return on Assets and also ROE is similar, especially if you compare 10 year average of ROE, Walmart has higher numbers. So in summary, we have looked at these ratios on profitability. Probably you could say that profitability is not the reason for Costco's higher P/E ratio.