BBoston Beer/Lion Brewery
ratio measures investor confidence in the company, and is the ratio of the market price per share to the earnings per share. The P/E ratios for both companies are shown below:
Price/earnings ratio = Market Price per share/ earnings per share
Lion Brewery 1995 Boston Beer 1995
=6/0.36 =15/0.41
=16.67 =36.59 times
A stock with a lower P/E ratio gives the investor more earnings per dollar invested. Therefore, Lion Brewery’s lower rate shows that they are better able to increase stockholders’ wealth than Boston Beer. However, Boston Beer’s higher P/E ratio indicates that investors have more confidence in the earning potential of that company than Lion Brewery. The earnings per share for Lion Brewery has decreased (as per the return on equity previously calculated), implying that the company’s stock is not as valuable as it used to be. However, it must be considered that Lion Brewery has no long term debts to pay off, so their earning power should be greater than that of Boston Beer. Also, we must consider the fact that the earnings per share may have fallen because the income was used to pay off the long term debt. This repayment of debt is not expected to reoccur, and so it is likely that the earnings per share should increase in 1997 and beyond. Therefore, it can be assumed that Lion Brewery future operations should generate more wealth for its investors. Notwithstanding the above, Boston Beer’s earning remain of a higher quality and is more persistent than that of Lion Brewery.
F) As potential investors, it may be worth our while to seek further information on Lion Brewery. It is not a company comparable in magnitude with Boston Beer, but it appears to have great potential for future earnings. We would be interested in learning the market price per share for years following 1995, so as to analyze whether or not the company’s current investors have increased confidence in its earning potential. This would further motivate potential investors to seek information about this company. Further, we would be interested in finding out for how long the company expects to postpone payments of dividends. Nonpayment of dividends indicates that the company expects market value of the stock to increase. However we would like to know when this expected increase will bear fruit. We would also be interested in the long term plans of the company, whether they plan to invest in fixed assets such as plants and machinery, which would increase debt and affect debt to equity ratio, and [next page]