Company X has a P/E ratio of 16 in year 2017 and 16.5 in 2018.In 2018 its P/E ratio is 24.The best way to interpret these data is to conclude that:
A)the shares are overpriced and should be sold.
B)the shares have 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 shares are under-priced and should be bought.

Question

Quizplus · Accepted Answer

P/E ratio alone is not enough to determine whether a stock should be bought or sold. Other financial results and news should be examined to determine the cause of the P/E ratio change. A sudden increase in P/E ratio could be due to an increase in earnings or anticipation of future growth, but it could also be due to a market anomaly or short-term trend. Therefore, it is important to analyze other financial information before making a decision to buy or sell the stock.

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