Company X has a P/E ratio of 16 in year 2009 and 16.5 in 2010.In 2011 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

The best way to interpret changes in P/E ratio is to examine other financial results and news to determine the cause of the change. A P/E ratio of 16 or 16.5 is not necessarily a sign of overpricing or great growth capacity, and a sudden increase in P/E ratio in 2011 could be due to various factors such as strong earnings growth, a change in the company's industry or market trends, or a change in investor sentiment. Therefore, further analysis is required to make an informed decision about whether to buy or sell the shares.

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