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Boston Beer Co. Inc. Message Board

  • cdanajackson cdanajackson Nov 17, 2012 1:32 AM Flag

    More expensive than you think

    SAM stock has a 12-month trailing P/E ratio of 25.15. However, when you look at the stock's trailing enterprise value to free cash flow ratio (EV/FCF), the stock is an incredibly expensive 65.44!

    The EV/FCF is a better metric to use than the P/E ratio because, the former takes into account the debt and cash a company has on its balance sheet. It also considers the free cash flow a company generates on its cash flow statement.

    The P/E ratio does none of this. The "P" in the P/E ratio only looks at a company's market cap. The "E" in the P/E ratio only looks at a company's reported earnings on its income statement.

    None of this is good, because reported earnings - net income - are open to all kinds of accounting measures and accounting tricks, depending on how the company wants to make the numbers look. Also, net income doesn't look at the actual cash profit - or loss - a company generates. A company can be generating growing earnings, but burning through cash.

    So, based on this metric the stock is in fact nearly three times more expense, than the P/E ratio would have you believe.

    I recommend investors leave the P/E ratio to Wall Street and the like, and stick to the enterprise value to free cash flow ratio.

    Looking at the EV/FCF metric from the flip side, SAM stock is yielding 1.53%. Whereas, the flip side of the P/E ratio - the earnings yield - has you believe the stock is yielding 3.98%.

    So, again stick with the EV/FCF ratio.

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