Company X has a P/E ratio of 16 in year 2010 and 16.5 in 2011. In 2012, its P/E ratio is 24. The best way to interpret these data is to conclude that:
A) the stock is overpriced and should be sold.
B) the stock has great growth capacity and should be bought.
C) other financial results and news should be examined to determine the cause of the P/E ratio change.
D) the stock is underpriced and should be bought.

Question

Quizplus · Accepted Answer

P/E ratios are not conclusive indicators of a stock's value or performance, which is why other financial results and news should be examined to determine the cause of the P/E ratio change. A higher P/E ratio may indicate that investors have higher expectations for the company's future earnings growth, but it could also be due to other factors such as a change in accounting methods or a one-time event that affects earnings. Therefore, it is important to consider multiple factors before making any investment decisions.

Company X Has a P/E Ratio of 16 in Year