The price-earnings ratio is a financial metric that compares which two elements?

• A. Dividend per share and Earnings per share
• B. Price per share and Earnings per share
• C. Market capitalization and Net income
• D. Debt and Equity

Answer: (B)

The main concept is that the price-earnings ratio shows how much investors are willing to pay for each dollar of a company’s earnings. It does this by comparing price per share to earnings per share (P/E = price per share ÷ earnings per share). The price per share reflects the market value of the stock, while earnings per share represents the company’s profit allocated to each outstanding share. By expressing earnings on a per-share basis, the P/E ratio standardizes valuation so you can compare different companies regardless of size. A higher P/E suggests investors expect stronger future growth and are paying more for current earnings, while a lower P/E might indicate lower growth expectations or undervaluation. Note that the ratio can be based on trailing earnings (past year) or forward earnings (projected). The other pairings, such as dividend per share with EPS or market cap with net income, do not define the P/E ratio.