Question

which is true:_______A. high p/e ratio could mean that the company has a great deal of uncertainty in its future earningsB. low p/e ratio could mean that the company has a great deal of uncertainty in its future earningsYou decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors (AAII). According to your understanding, a company with less competition is considered to be (more or less)risky than companies with a wide multiple competitiors.

Answer 1

Answer:

1. Which Statement is true:

B. low p/e ratio could mean that the company has a great deal of uncertainty in its future earnings.

2. Qualitative analysis:

According to your understanding, a company with less competition is considered to be (more or less) risky than companies with a wide multiple competitors.

Explanation:

Company A's Price/Earnings (P/E) ratio is calculated as the market price of its shares divided by the earnings per share.  It shows the value investors have over a stock.  With a high P/E ratio, the company's stock could be over-valued, or investors are expecting high growth rates in the future.  This is unlike a low P/E ratio that shows that the stock is undervalued or that investors are not expecting high growth rates in the future because of uncertainty.

Without competition, Company A is riskier  than Company B which operates efficiently and competitively.  There is that competitive edge that competitive companies possess.  Monopolies do not enjoy that advantage.  It is, therefore, riskier to have no competition.