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 of the following best describes a company with a high price-earnings (PE) ratio?

The company pays high dividends relative to its earnings.

The company is undervalued compared to its earnings.

Investors expect higher future earnings growth from the company.

The company is generating low profits relative to its stock price.

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Understand the concept of the Price-Earnings (PE) ratio: The PE ratio is calculated as the market price per share divided by the earnings per share (EPS). It is a measure of how much investors are willing to pay for a dollar of earnings.

Analyze the implications of a high PE ratio: A high PE ratio typically indicates that investors have high expectations for the company's future earnings growth. They are willing to pay a premium for the stock because they anticipate strong performance in the future.

Evaluate the incorrect options: A high PE ratio does not necessarily mean the company pays high dividends relative to its earnings, as dividends are not directly tied to the PE ratio. Similarly, a high PE ratio does not indicate undervaluation; it often suggests the opposite. Lastly, low profits relative to stock price might be a factor, but the primary driver is investor expectations for growth.

Focus on the correct interpretation: The correct answer is that investors expect higher future earnings growth from the company. This aligns with the fundamental purpose of the PE ratio as a valuation metric reflecting market sentiment about future performance.

Summarize the reasoning: A company with a high PE ratio is typically seen as a growth company, where investors are optimistic about its ability to generate higher earnings in the future, justifying the higher valuation.