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A company’s shares trade at \$48 per share and it reports net income of \$12,000,000 with 6,000,000 weighted-average common shares outstanding. What is the company’s price-earnings (P/E) ratio?
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14. Financial Statement Analysis
Ratios: Price-Earnings Ratio (PE Ratio)
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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
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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: .
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: .
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: .
Analyze the Current Ratio: This ratio measures a company's ability to pay short-term obligations with its current assets. It is calculated as: . It does not measure stock value relative to earnings.
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.
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