Which metric equals the price per share divided by earnings per share and is used to gauge stock valuation?

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

Answer: (C)

The price-earnings ratio is the metric described. It shows how many dollars investors are willing to pay for each dollar of a company’s earnings by dividing the price per share by earnings per share. This helps gauge stock valuation because it reflects market expectations for future earnings growth relative to current earnings. A higher P/E suggests investors expect stronger growth or are pricing in optimism, while a lower P/E can indicate less growth expectations or potential undervaluation. It’s most meaningful when compared across similar companies or industries, since different sectors carry different typical valuations. This ratio is distinct from other measures: dividend yield looks at cash return relative to price, market capitalization is the total value of the company (price per share times shares outstanding), and earnings per share is a profitability metric per share rather than a valuation multiple.