The following is true about the price earnings ratio
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A. B. C. D.A
PE ratio is calculated based on expected earnings per share and a ratio of less than 5 to 8 makes a stock appear underpriced.
The correct answer is D. The price-earnings (P/E) ratio is the ratio between a company's current market value (stock price) and its earnings per share (EPS).
Let's break down the components of the P/E ratio:
Price: The price refers to the current market price of a company's stock. It represents the amount investors are willing to pay for one share of the company.
Earnings per share (EPS): EPS is calculated by dividing the company's net income by the number of outstanding shares. It indicates how much profit is generated for each share of stock. EPS is an important financial metric that shows the company's profitability on a per-share basis.
The P/E ratio is calculated by dividing the stock's price by its EPS. It provides insights into the valuation of a company's stock relative to its earnings. A higher P/E ratio suggests that investors are willing to pay a premium for the company's earnings, indicating higher expectations for future growth. Conversely, a lower P/E ratio may indicate that the stock is relatively undervalued or that investors have lower growth expectations.
Now, let's address the other answer options:
A. The statement that all of the answers are correct is incorrect. The other options provide specific explanations about the P/E ratio, and not all of them are accurate.
B. The statement that the P/E ratio is calculated based on the expected earnings per share for the next period is incorrect. The P/E ratio is typically based on historical or trailing earnings per share, representing past profitability. However, some analysts might use forward P/E ratios, which consider expected future earnings.
C. The statement that stocks have low PE ratios if they are less than five to eight and are considered underpriced is incorrect. The interpretation of a low P/E ratio as underpriced or undervalued depends on various factors such as the industry, growth prospects, and market conditions. Generally, a low P/E ratio may indicate undervaluation, but it should be analyzed in the context of other relevant factors.
To summarize, the P/E ratio is a valuation metric that compares a company's stock price to its earnings per share. It helps investors assess the market's expectations and the relative value of a stock.