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What is a P/E ratio, and why is it important in stock valuation? Choose a company...

What is a P/E ratio, and why is it important in stock valuation? Choose a company stock, and discuss its P/E ratio. Do you believe the P/E ratio provides an accurate assessment of the company’s performance?

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Expert Solution

P/E ratio is the ratio of price per share divided by
earnings per share for any stock.
The most common use of the P/E ratio is to compare
a stock with comparable companies of the same industry.
For example, when analysts want to know if a company is undervalued
or overvalued the analysts use the P/E ratio.
The analysts draw out a list of companies that are comparable and belong to any
one given industry. Investors and analysts can pick undervalued stocks and go long
or they can short sell stocks that are overvalued.
The following are the P/E ratios for the stocks of the big three automobile companies
in the United States
Ford Motor company 13.29
General Motors 6.23
Fiat Chrysler 5.87
Based on the P/E ratios, Fiat Chrysler is the most undervalued stocks
when compared to other two automobile companies.
Ford motor company is the most overvalued stock.
The P/E ratio is a good measure of a given company's relative value
when compared to other comparable companies in the industry.
However, there are other kinds of ratios like profitability ratios, leverage ratios, and liquidity
ratios that are used to measure a company's performance.

jeff jeffy answered 1 year ago
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