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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use The Boston Beer Company, Inc.'s (NYSE:SAM) P/E ratio to inform your assessment of the investment opportunity. What is Boston Beer Company's P/E ratio? Well, based on the last twelve months it is 37.96. That is equivalent to an earnings yield of about 2.6%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Boston Beer Company:
P/E of 37.96 = $347.83 ÷ $9.16 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Boston Beer Company saw earnings per share improve by -6.6% last year. And its annual EPS growth rate over 5 years is 10%.
Does Boston Beer Company Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (29.7) for companies in the beverage industry is lower than Boston Beer Company's P/E.
That means that the market expects Boston Beer Company will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Boston Beer Company's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Boston Beer Company's US$72m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Boston Beer Company's P/E Ratio
Boston Beer Company has a P/E of 38. That's higher than the average in the US market, which is 18. Earnings improved over the last year. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Boston Beer Company. So you may wish to see this free collection of other companies that have grown earnings strongly.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.