Which one of the following statements is true concerning the price-earnings (PE)ratio?
A)A high PE ratio may indicate 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.
E)The PE ratio is a constant value for each firm.

Question

Quizplus · Accepted Answer

A high PE ratio can indicate that investors expect significant growth in a company's earnings, which can justify a higher stock price. A PE ratio compares the current stock price with the earnings per share, so choice B is incorrect. Accounting methods can affect earnings and therefore PE ratio, making choice C incorrect. The PE ratio is not directly a measure of profitability, but rather a measure of market sentiment towards earnings, so choice D is incorrect. Finally, the PE ratio can vary over time based on changes in earnings and stock prices, so choice E is incorrect.

Which One of the Following Statements Is True Concerning the Price-Earnings