Understanding Price-to-Earnings (P/E) Ratio

Very Easy Equity Valuation Techniques Price Multiples

In equity valuation, price multiples are commonly used to assess the value of a company's stock relative to certain metrics. One popular price multiple is the Price-to-Earnings (P/E) ratio, which compares a company's current share price to its earnings per share (EPS).

Which of the following statements correctly describes the use of the Price-to-Earnings (P/E) ratio in equity valuation?

A lower P/E ratio always indicates a better investment opportunity.

A higher P/E ratio may reflect higher expected growth in earnings.

The P/E ratio is irrelevant for companies with negative earnings.

Hint

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