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)

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

If The Eatery has a market-to-book ratio of 3.2, what does this ratio indicate?

The market values The Eatery at 3.2 times its book value, suggesting investors expect strong future growth.

The Eatery's liabilities are 3.2 times its equity.

The Eatery's earnings per share are 3.2 times higher than its book value per share.

The Eatery's stock price is undervalued compared to its book value.

Previous problemNext problem

Verified step by step guidance

Step 1: Understand the concept of the market-to-book ratio. This ratio compares the market value of a company (its stock price multiplied by the number of shares outstanding) to its book value (the value of its net assets as recorded on the balance sheet). It is a measure of how investors value the company relative to its accounting value.

Step 2: Analyze the given market-to-book ratio of 3.2. This indicates that the market values The Eatery at 3.2 times its book value. Investors are willing to pay a premium over the book value, which often suggests expectations of strong future growth or profitability.

Step 3: Evaluate the options provided in the problem. The correct interpretation of the market-to-book ratio is that it reflects the market's valuation of the company relative to its book value, not its liabilities, equity, or earnings per share.

Step 4: Eliminate incorrect options. For example, the statement 'The Eatery's liabilities are 3.2 times its equity' is unrelated to the market-to-book ratio. Similarly, 'The Eatery's earnings per share are 3.2 times higher than its book value per share' confuses earnings with valuation metrics.

Step 5: Conclude that the correct interpretation is: 'The market values The Eatery at 3.2 times its book value, suggesting investors expect strong future growth.' This aligns with the purpose of the market-to-book ratio as a valuation metric.