When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high.

Name: When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high.
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Question

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When a firm's earnings sharply drop off, its price remains same or may decrease slightly, as the market already accounts for the drop in earnings. This results in a higher P/E ratio, which does not accurately reflect the actual value of the firm.

When a Firm Has a Sharp Drop Off in Earnings