What ratio is used to evaluate how expensive a stock is relative to its earnings?

• A. Dividend Yield
• B. Market Capitalization
• C. Earnings Per Share
• D. Price-Earnings Ratio

Answer: (D)

Evaluating how expensive a stock is relative to its earnings is done with the price-earnings ratio. This measures how much investors are willing to pay for each dollar of earnings by dividing the share price by earnings per share. A higher ratio means investors are paying more per dollar of earnings, signaling higher growth expectations or a pricier valuation, while a lower ratio suggests a cheaper valuation or more modest growth expectations. It’s especially useful to compare similar companies or industry peers.

Earnings per share tells you the profit allocated to each share but doesn’t indicate how much the market values that earnings. Dividend yield shows cash return relative to price, not how pricey the stock is relative to earnings. Market capitalization reflects company size, not valuation relative to earnings.