# The Price / Earnings Ratio Essay

# The Price / Earnings Ratio Essay

**Length:** 1205 words (3.4 double-spaced pages)

**Rating:** Better Essays

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Price/Earnings Ratio

Cracker Barrel has experienced a constant increase in its price/earnings ratio, with only one decrease in 2011, the only year to suffer a decrease in the company’s market price. This ratio indicates that investors were willing to pay an average of $14 for each $1 of earnings during the five year period. In 2013, the price/earnings ratio significantly increased as the market price at the year-end almost doubled. During the five year period, Cracker Barrel has been able to increase the confidence investors have in the company’s future performance.

However, Bob Evans considerably exceeds Cracker Barrel’s price/earnings ratio. Investors are willing to pay $35.89 for each $1 of earnings, which demonstrates that investors are more confident in investing their money in Bob Evans since they believe that Bob Evans has a greater probability of financial growth.

Market/Book Ratio

Over the five year period, Cracker Barrel’s market/book ratio has been somewhat instable, which reflects the fluctuation in the company’s market price at year end for this period. Overall, this ratio indicates that investors were willing to pay an average of $4.37 for each $1 of book value of Cracker Barrel’s stock over the last five years. Certainly, Cracker Barrel had a its best market/book ratio in 2010 as a result of a better balance between its total common equity, market price, and number of shares issued and outstanding in 2010. Even though in 2011 total common equity increased by 29%, the company’s market price decreased by 6.9% and its numbers of shares increased by only 0.45%, which resulted in the lowest market/book ratio for the five year period. In the following years, the company’s market/book ratio grew, reaching...

... middle of paper ...

...arrel’s ratio in 2014 was a low 17.13. Even though Cracker Barrel proved to be highly profitable, investors are more attracted to Bob Evans. Risks associated with Cracker Barrel’s indebtedness and slow inventory turnover may be the reason for the low level of confidence investors have in the company. However, Cracker Barrel’ share market price has been increasing because investors expect high returns relative to its risks.

Effectively, each year the company has been generating more sales by getting rid of some of its weaknesses, such as its debt, and taking advantage of its strengths. Cracker Barrel seems much focused on strategies that have proved to be generally successful. The company will more than likely continue to grow, just like Bob Evans, but unlike Bob Evans, Cracker Barrel will possibly directly compete with the industry magnates in the very near future.

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