The price-to-earnings (P/E) ratio is a valuation ratio used to determine the relative value of a company's shares. It is calculated by dividing the market price per share by the earnings per share (EPS). A high P/E ratio indicates that investors expect high earnings growth. In contrast, a low P/E ratio suggests that the stock may be undervalued or that investors expect lower earnings growth.
Which of the following best describes the price-to-earnings (P/E) ratio?
Not Correct
Correct!
Select an option above to see an explanation here.
A) This is the price-to-sales (P/S) ratio. B) The price-to-earnings (P/E) ratio is calculated by dividing the market price per share by the earnings per share (EPS). C) This is the price-to-book (P/B) ratio. D) This is the dividend yield.
Which of the following stocks is likely to have a higher P/E ratio?
A) Growth stocks typically have higher P/E ratios, as investors are expecting high future growth in earnings. B) Value stocks typically have lower P/E ratios, as they are considered undervalued by the market. C) Dividend yield is not directly related to the P/E ratio. D) A low price-to-book (P/B) ratio does not necessarily indicate a high P/E ratio.
What is the main difference between the forward P/E ratio and the trailing P/E ratio?
A) The forward P/E ratio uses estimated earnings for the next 12 months, while the trailing P/E ratio uses earnings for the past 12 months. B) This is the reverse of the correct answer. C) This describes the difference between the price-to-sales (P/S) ratio and the price-to-earnings (P/E) ratio. D) This describes the difference between the price-to-book (P/B) ratio and the price-to-earnings (P/E) ratio.
In the late 1990s, technology stocks experienced a significant increase in their P/E ratios, as investors were expecting high future growth in earnings. This led to the dot-com bubble, which eventually burst in 2000, causing a significant decline in the stock market.
Become a Pro Member to see more questions
Example Series 65 Example Practice Question
In 2021, the P/E ratio of the S&P 500 index reached an all-time high, driven by the strong performance of technology stocks during the COVID-19 pandemic.
When P/E is high, growth's the reason why; when P/E is low, value's the way to go.
Price-to-Earnings (P/E) Ratio = Market Price per Share / Earnings per Share (EPS)
Company ABC has a market price per share of $50 and reported earnings per share of $5. P/E Ratio = Market Price per Share / Earnings per Share P/E Ratio = $50 / $5 P/E Ratio = 10