Which of the following is a market value ratio ? Total asset turnover ratio Quick Ratio...

Which of the following is a market value ratio ?

	Total asset turnover ratio
	Quick Ratio
	Price-Earnigs ( P/E ) ratio
	Return on Equity (ROE

Expert Solution

The correct answer is Price-Earnings (P/E) ratio

For an investor it is very important to know whether the share prices of a company is underpriced, correctly priced or overpriced. To determine this an investor uses market value ratio which helps him in assessing the above scenarios before making an investment.

One of the examples of a market value ratio is Price-Earnings (P/E) ratio.

Price Earnings Ratio (P/E ratio) = Stock Price / Earnings per share

Price Earnings Ratio helps to determine whether stock of a company is undervalued or overvalued.

The Earnings per share or EPS only shows the profitability of the year but the Price Earnings ratio takes into consideration the future growth and risk related to the stock as well.

When we are comparing two stocks and we have to decide which stock is overvalued and which one is undervalued it is to be noted that

A stock with a higher PE ratio is considered overvalued
A stock with a lower PE ratio is considered undervalued

jeff jeffy answered 1 year ago

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