What does the price-to-earnings (P/E) ratio indicate?
Practice Questions
1 question
Q1
What does the price-to-earnings (P/E) ratio indicate?
Company's profitability
Market's expectations of future earnings
Company's liquidity position
Company's asset management efficiency
The price-to-earnings (P/E) ratio indicates the market's expectations of future earnings based on the current share price relative to earnings per share.
Questions & Step-by-step Solutions
1 item
Q
Q: What does the price-to-earnings (P/E) ratio indicate?
Solution: The price-to-earnings (P/E) ratio indicates the market's expectations of future earnings based on the current share price relative to earnings per share.
Steps: 5
Step 1: Understand that the P/E ratio is a number that helps investors evaluate a company's stock price.
Step 2: Know that 'price' refers to the current share price of the company's stock.
Step 3: Understand that 'earnings' refers to the company's profit, specifically earnings per share (EPS).
Step 4: Realize that the P/E ratio is calculated by dividing the current share price by the earnings per share (EPS).
Step 5: Recognize that a high P/E ratio may indicate that investors expect future growth in earnings, while a low P/E ratio may suggest that the company is undervalued or not expected to grow much.
