Which metric compares a stock's current price to its earnings per share?

• A. P/E Ratio
• B. Beta
• C. Dividend Yield
• D. Income Statement

Answer: (A)

This question hinges on understanding a valuation metric that links what you pay for a stock with how much the company earns. The price-to-earnings ratio is calculated by dividing the current price per share by the earnings per share, typically using trailing twelve months of earnings. It tells you how many dollars investors are willing to pay for each dollar of earnings. A higher P/E suggests investors expect stronger future growth or are simply valuing the stock more highly, while a lower P/E can indicate undervaluation or doubts about future performance. This metric is most informative when you compare companies within the same industry or against the market, and when you note whether you’re using trailing or forward earnings. Other options measure different things: beta is about volatility relative to the market; dividend yield relates annual dividends to price; and the income statement is a financial report of revenues and expenses, not a valuation ratio. Remember that earnings quality and accounting differences can affect the P/E, so use it alongside other analyses.