Which of the following ratios measures the value of a stock relative to its earnings?

• A. Dividend Yield
• B. Price-Earnings (PE) Ratio
• C. Debt-to-Equity Ratio
• D. Current Ratio

Answer: (B)

Verified step by step guidance

1. Understand the concept of the Price-Earnings (PE) Ratio: This ratio measures the value of a stock relative to its earnings. It is calculated by dividing the market price per share by the earnings per share (EPS). The formula is: $\frac{\mathrm{Market Price per Share}}{\mathrm{Earnings per Share}}$.
2. Review the Dividend Yield: This ratio measures the annual dividend income relative to the stock price, not the stock's value relative to its earnings. It is calculated as: $\frac{\mathrm{Annual Dividend per Share}}{\mathrm{Market Price per Share}}$.
3. Examine the Debt-to-Equity Ratio: This ratio measures a company's financial leverage by comparing its total liabilities to shareholders' equity. It does not relate to stock value or earnings. The formula is: $\frac{\mathrm{Total Liabilities}}{\mathrm{Shareholders\text{'} Equity}}$.
4. Analyze the Current Ratio: This ratio measures a company's ability to pay short-term obligations with its current assets. It is calculated as: $\frac{\mathrm{Current Assets}}{\mathrm{Current Liabilities}}$. It does not measure stock value relative to earnings.
5. Conclude that the Price-Earnings (PE) Ratio is the correct answer because it directly measures the value of a stock relative to its earnings, aligning with the question's requirement.