Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Price-Earnings Ratio (PE Ratio)

Financial Accounting

14. Financial Statement Analysis

Ratios: Price-Earnings Ratio (PE Ratio)

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Multiple Choice

Which one of the following statements is true concerning the price-earnings (PE) ratio?

A higher PE ratio always indicates a company is undervalued.

The PE ratio measures a company's ability to pay its short-term liabilities.

The PE ratio is calculated by dividing the market price per share by the earnings per share (EPS).

The PE ratio is calculated by dividing earnings per share by the market price per share.

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Verified step by step guidance

Step 1: Understand the concept of the Price-Earnings (PE) ratio. The PE ratio is a financial metric used to evaluate the valuation of a company by comparing its market price per share to its earnings per share (EPS). It helps investors assess whether a stock is overvalued or undervalued relative to its earnings.

Step 2: Clarify the formula for calculating the PE ratio. The correct formula is:

\frac{Market Price Per Share}{Earnings Per Share (EPS)}

. This means dividing the market price per share by the earnings per share.

Step 3: Analyze the statements provided in the problem. For example, the statement 'A higher PE ratio always indicates a company is undervalued' is incorrect because a higher PE ratio typically suggests that investors expect higher growth, but it does not necessarily mean the company is undervalued.

Step 4: Evaluate the statement 'The PE ratio measures a company's ability to pay its short-term liabilities.' This is incorrect because the PE ratio is not related to liquidity or short-term liabilities; it is a valuation metric.

Step 5: Confirm the correct statement: 'The PE ratio is calculated by dividing the market price per share by the earnings per share (EPS).' This aligns with the formula and definition of the PE ratio, making it the correct answer.