When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider The Boston Beer Company, Inc. (NYSE:SAM) as a stock to avoid entirely with its 44.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Boston Beer Company hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Boston Beer Company's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 12% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 34% per annum over the next three years. With the market only predicted to deliver 11% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Boston Beer Company's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Boston Beer Company's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Boston Beer Company that you should be aware of.

Of course, you might also be able to find a better stock than Boston Beer Company. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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