Final answer:
The price to earnings ratio measures the 'multiple' that the stock market places on a firm's earnings, essentially how much investors are willing to pay for each dollar of earnings.
Step-by-step explanation:
The price to earnings ratio (P/E ratio) measures (a) the "multiple" that the stock market places on a firm's earnings. This financial metric is commonly used to value a company by showing how much investors are willing to pay per dollar of earnings. The P/E ratio is calculated by dividing the market value per share by the earnings per share (EPS). A high P/E ratio could mean that a company's stock is overvalued, or investors are expecting high growth rates in the future. Conversely, a low P/E ratio could indicate that the stock is undervalued or that the company is not expected to grow significantly.
The relationship between dividends and market prices, earning for one common share of stock, and the percentage of dividends paid to net earnings of the firm are not described by the P/E ratio. These aspects relate to other financial metrics and ratios used in the investment community to assess a company's financial health and stock performance.
Investing in the stock market involves both potential dividends and capital gains. The total return on stocks includes dividends and the increase in stock value. Over time, the proportion of dividends and capital gains can vary considerably, influencing investor returns.