Multiple Choice
Which type of variance is defined as the difference between the actual price per unit and the standard price per unit?
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14. Financial Statement Analysis
Introduction to Ratios
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which ratio measures a company's market expectations for future growth?
A
Current ratio
B
Debt-to-equity ratio
C
Inventory turnover ratio
D
Price/Earnings (P/E) ratio
Verified step by step guidance1
Understand the concept of the Price/Earnings (P/E) ratio: It is a financial metric used to evaluate a company's market expectations for future growth by comparing its current share price to its earnings per share (EPS).
Recognize that the P/E ratio is not directly related to liquidity (like the Current ratio), leverage (like the Debt-to-equity ratio), or operational efficiency (like the Inventory turnover ratio). Instead, it focuses on market valuation and growth expectations.
Learn the formula for calculating the P/E ratio: \( \text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}} \). This formula highlights the relationship between the market price and the company's earnings.
Understand the interpretation of the P/E ratio: A higher P/E ratio typically indicates that investors expect higher future growth, while a lower P/E ratio may suggest lower growth expectations or undervaluation.
Apply this knowledge to identify that the P/E ratio is the correct answer to the question, as it directly measures market expectations for future growth.
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