Question

Starbucks currently has a P/E ratio of 28. What is the definition of the P/E ratio and what does it measure? Interpret Starbucks P/E ratio in a sentence and compare it to Dunkin Brands’ P/E ratio (22.0).

Answer 1

P/E ratio definition: It is the price per share of the company to the earnings per share of the company.

The earnings per share is calculated by dividing the company's net profit by the total number of shares outstanding.

Starbucks current P/E ratio of 28 can be interpreted as the price paid is $28 for every $1 of net profit generated by Starbucks.

If the competitor Dunkin Brands has a P/E ratio of 22, it means that the stock is trading at 22 times the current earnings of the company. In comparison to Dunkin Brands, Starbucks is overvalued because it has a higher P/E ratio. In other words, for every dollar profit generated by both the companies, we pay $28 per share for Starbucks and only $22 per share for Dunkin Brands.