Question

Zale is a new investor. He studies the financial pages and finds a company whose stock market EPS has risen while its P/E ratio has declined. What should Zale do?                                                                                                                                                           a.do not invest in the stock because the price is not keeping up with earnings
b.invest in the stock because the price has increased drastically
c.invest in the stock because earnings are rising while the stock price is not rising
d.do not invest in the stock because earnings are decreasing

Answer 1

Answer:

The correct option is B) invest in the stock because the price has increased drastically.

Explanation:

Earning per share (EPS) is calculated by dividing net profit over number of outstanding shares. Where as the P/E ratio is calculated by dividing share price over earnings/profits. Decrease in P/E ratio indicates that  company's earnings have improved over its price. Further increase in EPS also suggests rise in earnings. Both formula indicates rise  in earnings which indicates that company is in profits and can easily expect better dividend yield and future growth. So it is high time to invest in the company.