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Comment on the view that the price/earnings (P/E) ratio is an “attempt to value a company in terms of its earnings'.

      

Comment on the view that the price/earnings (P/E) ratio is an “attempt to
value a company in terms of its earnings'.

  

Answers


Martin
A P/E ratio may be established and used as a method of valuing the shares of an
unquoted company, but it is a facility to read too much significance into the P/E ratio or
quoted companies. The EPS is determined by the success (or otherwise) of a company's
management, and the share price on the market is determined by many factors
(dividends, growth prospects, government policy, the economic situation e.t.c.) of which
the EPS is only one. The P/E ratio is therefore an interesting and useful measure of
comparison, but it does not of itself possess any inherent significance which is used by
investors to fix share prices.

marto answered the question on February 11, 2019 at 11:19


Next: List and briefly discuss three possible reasons why companies in the same type of business may have different price/earnings (P/E) ratios.
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