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Is Molson Coors Brewing Company's (NYSE:TAP) P/E Ratio Really That Good?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Molson Coors Brewing Company's (NYSE:TAP) P/E ratio to inform your assessment of the investment opportunity. Molson Coors Brewing has a P/E ratio of 12.44, based on the last twelve months. That corresponds to an earnings yield of approximately 8.0%.

Check out our latest analysis for Molson Coors Brewing

How Do I Calculate Molson Coors Brewing's Price To Earnings Ratio?

The formula for price to earnings is:

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Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Molson Coors Brewing:

P/E of 12.44 = $56.97 ÷ $4.58 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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

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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Molson Coors Brewing's earnings per share fell by 40% in the last twelve months. But it has grown its earnings per share by 3.7% per year over the last five years.

How Does Molson Coors Brewing'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. The image below shows that Molson Coors Brewing has a lower P/E than the average (31.3) P/E for companies in the beverage industry.

NYSE:TAP Price Estimation Relative to Market, June 10th 2019
NYSE:TAP Price Estimation Relative to Market, June 10th 2019

This suggests that market participants think Molson Coors Brewing will underperform other companies in its industry. Since the market seems unimpressed with Molson Coors Brewing, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. 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.

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).

Molson Coors Brewing's Balance Sheet

Net debt totals 81% of Molson Coors Brewing's market cap. 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 Molson Coors Brewing's P/E Ratio

Molson Coors Brewing has a P/E of 12.4. That's below the average in the US market, which is 17.5. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.