Understanding Price-to-Earnings Ratio in Equity Valuation

Very Easy Equity Valuation Applications Market-based Valuation

In the context of equity valuation, market-based valuation approaches are often used to estimate a company's worth by comparing it to similar entities in the market.

A commonly used market-based valuation multiple is the price-to-earnings (P/E) ratio. This ratio is calculated by dividing the current share price of a company by its earnings per share (EPS).

Which of the following statements correctly describes a characteristic of the price-to-earnings (P/E) ratio?

The P/E ratio is a measure that only applies to companies with positive earnings.

The P/E ratio can be used for companies with negative earnings.

The P/E ratio is derived from the company's book value.

Hint

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