Future Business Leaders of America (FBLA) Business Calculations Practice Test

P/E is:

1. A stock's earnings divided by the price

2. The ratio of a stock's price to its earning

3. The dividend of a stock

4. The price times earnings of a stock

The correct answer is: The ratio of a stock's price to its earning

The price-to-earnings ratio, commonly referred to as P/E, is defined as the ratio of a stock's current market price to its earnings per share (EPS). This ratio provides an indication of how much investors are willing to pay for a dollar of earnings, which is a crucial metric for evaluating a stock's valuation. A higher P/E ratio might suggest that a stock is overvalued or that investors are anticipating growth rates that are higher than those of the overall market. Understanding the P/E ratio is important for investors, as it helps them make more informed decisions about stock purchases. It allows for comparisons between companies in the same industry, giving insight into which stocks are under or overvalued based on their earnings. The definition accurately captures the essence of what P/E represents in financial analysis, making it a vital concept in assessing investment opportunities.