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Do You Like Anheuser-Busch InBev SA/NV (EBR:ABI) At This P/E Ratio?

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 Anheuser-Busch InBev SA/NV's (EBR:ABI) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Anheuser-Busch InBev's P/E ratio is 16.59. That means that at current prices, buyers pay €16.59 for every €1 in trailing yearly profits.

View our latest analysis for Anheuser-Busch InBev

How Do You Calculate Anheuser-Busch InBev's P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

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Or for Anheuser-Busch InBev:

P/E of 16.59 = €80.21 (Note: this is the share price in the reporting currency, namely, USD ) ÷ €4.84 (Based on the year to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

How Does Anheuser-Busch InBev's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (20.7) for companies in the beverage industry is higher than Anheuser-Busch InBev's P/E.

ENXTBR:ABI Price Estimation Relative to Market, October 30th 2019
ENXTBR:ABI Price Estimation Relative to Market, October 30th 2019

Anheuser-Busch InBev's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

It's nice to see that Anheuser-Busch InBev grew EPS by a stonking 38% in the last year. And its annual EPS growth rate over 3 years is 36%. I'd therefore be a little surprised if its P/E ratio was not relatively high. But earnings per share are down 3.0% per year over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Anheuser-Busch InBev's Debt Impact Its P/E Ratio?

Anheuser-Busch InBev has net debt worth 65% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On Anheuser-Busch InBev's P/E Ratio

Anheuser-Busch InBev has a P/E of 16.6. That's around the same as the average in the BE market, which is 16.0. The significant levels of debt do detract somewhat from the strong earnings growth. The P/E suggests the market isn't confident that growth will be sustained, though.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Anheuser-Busch InBev. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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 editorial-team@simplywallst.com. 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.