Question

Although Financial Ratio Analysis has limitations, it is a great tool to find the problematic areas in the company so that managers can go back and address the problems. One of the limitations is differences in accounting standards around the world that can distort financial ratios.

Starbucks / PepsiCo

these are two publicly traded US companies listed on the NASDAQ stock market and calculate each company’s P/E (Price to Earnings Ratio) and MB (Market to Book Ratio). What do these ratios tell you about how investors value these two companies’ future prospects?

Answer 1

Answer:

P/E Ratio- Price earning ratio is the relationship between price per share and earning per share, it tells how much investors are paying for one stock and how much earning, they are getting on a single stock.

Formula: Current price per share/Earning per share

M/B Ratio- Market to book ratio compares the current price of the stock to its book value.

Formula: M/B ratio = Market capitalization of company/Book value of company

Calculating P/E and /B Ratios as of today-

P/E Ratio of Pepsico- Company current share price (as on Sep.24) is $131.58, EPS (Diluted) for trailing twelve months ending in June 2020 is $4.89.

P/E RATIO: 131.58/4.89 = 26.91

This ratio tells that Pepsico's price is good as compare to its earning per share. Share is not costly.

P/E Ratio of Starbucks- Company's current share price (as on Sep.24) is $83.04, EPS (Diluted) for trailing twelve months ending in June 2020 is $1.11.

P/E RATIO: 83.04/1.11 = 74.81

This shows that share is costly, investors are paying higher price for Starbucks' share rather than its earning per share. Investors are expecting growth in the company in the future that is why buying its share and ready to pay higher price.