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

How is the price-earnings (PE) ratio computed?

Net income divided by total assets

Earnings per share divided by market price per share

Market price per share divided by book value per share

Market price per share divided by earnings per share

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Verified step by step guidance

Understand the concept of the Price-Earnings (PE) ratio: It is a financial metric used to evaluate the relative value of a company's shares by comparing its market price to its earnings per share (EPS).

Identify the formula for the PE ratio: The formula is \( \text{PE Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}} \).

Clarify the components of the formula: The 'Market Price per Share' refers to the current trading price of one share of the company's stock, and 'Earnings per Share (EPS)' is calculated as \( \text{Net Income} \div \text{Number of Outstanding Shares} \).

Apply the formula: To compute the PE ratio, divide the market price per share by the earnings per share (EPS). Ensure both values are expressed in the same currency and are accurate.

Interpret the result: A higher PE ratio may indicate that the market expects higher growth or profitability from the company, while a lower PE ratio might suggest undervaluation or lower growth expectations.