Understanding Price-to-Earnings Ratio

Very Easy Equity Valuation Techniques Price Multiples

Price multiples are widely used in equity valuation to compare the value of one stock against another. One common price multiple is the Price-to-Earnings (P/E) ratio, which relates the company's current share price to its earnings per share (EPS). Understanding how to interpret these multiples is crucial for investors aiming to assess whether a stock is overvalued, undervalued, or fairly priced.

Which of the following statements about the Price-to-Earnings (P/E) ratio is true?

A higher P/E ratio indicates that a stock is undervalued.

A lower P/E ratio may suggest that a stock is undervalued compared to its peers.

The P/E ratio should only be used on its own without considering market conditions.

Hint

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