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* Competitive companies are chosen from companies within the same industry, with headquarter located in same country, with closest market capitalization; x-axis shows the market cap, and y-axis shows the term value; the bigger the dot, the larger the market cap.

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Calculation

The P/E ratio is the most widely used ratio in the valuation of stocks.

Boston Beer Co Inc's P/E Ratio for today is calculated as

Boston Beer Co Inc's Share Price of today is $154.25.
Boston Beer Co Inc's Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Jun. 2017 was 2.48 (Sep. 2016 ) + 1.74 (Dec. 2016 ) + 0.45 (Mar. 2017 ) + 2.35 (Jun. 2017 ) = $6.79.

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

It can also be calculated from the numbers for the whole company:

There are at least three kinds of P/E ratios used by different investors. They are Trailing Twelve Month P/E Ratio or P/E (ttm), forward P/E, or PE Ratio without NRI. A new P/E ratio based on inflation-adjusted normalized P/E ratio is called Shiller PE Ratio, after Yale professor Robert Shiller.

In the calculation of P/E (ttm), the earnings per share used are the earnings per share over the past 12 months. For Forward P/E, the earnings are the expected earnings for the next twelve months. In the case of PE Ratio without NRI, the reported earnings less the non-recurring items are used.

For the Shiller P/E, the earnings of the past 10 years are inflation-adjusted and averaged. The result is used for P/E calculation. Since it looks at the average over the last 10 years, Shiller P/E is also called PE10.

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Explanation

The P/E ratio can be viewed as the number of years it takes for the company to earn back the price you pay for the stock. For example, if a company earns $2 a share per year, and the stock is traded at $30, the P/E ratio is 15. Therefore it takes 15 years for the company to earn back the $30 you paid for its stock, assuming the earnings stays constant over the next 15 years.

In real business, earnings never stay constant. If a company can grow its earnings, it takes fewer years for the company to earn back the price you pay for the stock. If a company’s earnings decline it takes more years. As a shareholder, you want the company to earn back the price you pay as soon as possible. Therefore, lower-P/E stocks are more attractive than higher P/E stocks so long as the P/E ratio is positive. Also for stocks with the same P/E ratio, the one with faster growth business is more attractive.

If a company loses money, the P/E ratio becomes mearningless.

To compare stocks with different growth rates, Peter Lynch invented a ratio called PEG. PEG is defined as the P/E ratio divided by the growth ratio. He thinks a company with a P/E ratio equal to its growth rate is fairly valued. Still he said he would rather buy a company growing 20% a year with a P/E of 20, instead of a company growing 10% a year with a P/E of 10.

Because the P/E ratio measures how long it takes to earn back the price you pay, the P/E ratio can be applied to the stocks across different industries. That is why it is the one of the most important and widely used indicators for the valuation of stocks.

Similar to the Price/Sales ratio and Price/Cash Flow or Price/Free Cash Flow, the P/E ratio measures the valuation based on the earning power of the company. This is where it is different from the Price/Book ratio, which measures the valuation based on the company’s balance sheet.

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Be Aware

Investors need to be aware that the P/E ratio can be misleading a lot of times, especially when the underlying business is cyclical and unpredictable. As Peter Lynch pointed out, cyclical businesses have higher profit margins at the peaks of the business cycles. Their earnings are high and P/E ratios are artificially low. It is usually a bad idea to buy a cyclical business when the P/E is low. A better ratio to identify the time to buy a cyclical businesses is the Price-to-Sales Ratio (P/S).

P/E ratio can also be affected by non-recurring-items such as the sale of part of businesses. This may increase for the current year or quarter dramatically. But it cannot be repeated over and over. Therefore PE Ratio without NRI is a more accurate indication of valuation than P/E (ttm).

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Related Terms

Market Cap (M) Net Income Shiller PE Ratio PB Ratio PS Ratio Price-to-Free-Cash-Flow EPS without NRI Earnings per Share (Diluted) EPS (Basic) PE Ratio without NRI

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