Editor's note: Welcome to "Booyah Breakdown," an explanation of certain terms and topics Jim Cramer discusses on his "Mad Money" TV show. Feel free to ask a question if you're confused about something Cramer talks about, but please keep in mind that we do not provide advice on specific stocks. My son and I walked past the new Porsche Cayman the other day, and I got excited and said, "That car is hot!" And my super-bright 5-year-old responded by saying, "But Mommy, I just touched it, and it's actually pretty cold." Right. So I proceeded to explain that sometimes when things are really cool, we say they're hot. And he looked at me like I was the stupidest woman in the world. So I retracted my original statement and said, "That car is beautiful, and I bet it goes really fast." "Yeah, like 1,000 miles per hour!" he said Now we're on the same page. Clearly, there's no place for slang when you're trying to teach someone the English language. Or any language for that matter. And if you're dabbling in the stock world, you need to understand its language as well. But the pundits get colloquial and use their own sort of slang sometimes. They speak quickly and throw out abbreviations or acronyms, and then many of us have no idea what they're talking about. One of these terms that is often thrown around without explanation is growth rate. Jim Cramer mentions it on "Mad Money" constantly, saying he won't buy a company that has a P/E of more than two times its growth rate. So, if a company's growth rate is 30%, its P/E better be below 60, or he's not going near it. And while we tackled the P/E ratio last week , the growth rate still has many of you stumped.
So What Are They Talking About?
"The growth rate of a company generally refers to the rate of growth of the corporate earnings," says Frank Fernandez, chief economist at the Securities Industry Association. That means that when pundits mention a company's growth rate, they're generally referring to how earnings have grown from one period to the next. To watch Tracy Byrnes' video take of this column, click here .