Pick three of your favorite publicly traded companies and research their price earnings ratio (often written as PE or P/E Ratio). There are countless websites that track this information, such as finance.google.com, finance.yahoo.com, Nasdaq.com, Reuters). I chose Walmart, Target, and Costco. It helps if the three companies are in the same industry though they do not need to be. Walmarts P/E Ratio is 26.52, Targets P/E Ratio is 23.06, and Costcos P/E ratio is 41.52.

Price Earnings ratio is the ratio of current share price divided by the companys earnings per share. We learn about both in Chapter 12. The current share price is the price someone is willing to pay for one share (part ownership) of a company. Earnings per share, is the Net Income Preferred Dividends divided by the number of common shares outstanding. Price Earnings Ratio is the most commonly used valuation calculation of a companys share price. P/E Ratio calculates the price someone is willing to pay for $1 of earnings. For example, Costcos share price is $374.29, and their earnings per share is $9.05. So its P/E Ratio is 41.52. Targets share price is $174.07, and their earnings per share is $7.62. Fairly similar earnings per share (how much each shareholder is would receive of this years earnings). But investors are willing to pay twice as much for a share of Costco stock.

Your job is to research the three companys price earnings ratios, and then give your interpretation as to why one company has a higher price earnings ratio relative to the others. Why, in my example, are investors willing to pay twice as much for a share of Costco stock vs Walmart or Target? I think it is because Costco has a unique business model that has few competitors such as Sams Club or BJs Wholesale Club (a mostly East Cost warehouse club), and Costco is the best. Walmart and Target compete with many more competitors, including supermarkets and Amazon. Costco also earns a good part of their revenue from annual membership fees, helping to stabilize their business if the economy slows down. Costco has a consumer and corporate business (they sell office supplies, food, etc. to businesses), which is a more diversified model than Target and Walmart, who primarily only sell to individual consumers. Lastly, there are many more Targets and Walmart stores in the United States and it is tough for them to find places to expand. Over 90% of Americans live within 10 miles of a Walmart! Costco has much more opportunity for growth in the future.