Question

Which one of the following statements is true concerning the price-earnings (PE) ratio?A. A high PE ratio typically indicates that a firm is expected to grow significantly.B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings.C. PE ratios are unaffected by the accounting methods employed by a firm.D. The PE ratio is classified as a profitability ratio.

Answer 1

Answer:

The correct answer is letter "A": A high PE ratio typically indicates that a firm is expected to grow significantly.

Explanation:

Price-earnings (P/E) ratio reflects the relationship between a given company's share price and the company's earnings per share. It is usually taken as a positive measure because it shows that investors expect high growth rates for the stock. In some other cases, it may be a sign of over-valuation of the stock.