Final answer:
The price/earnings ratio of a stock reflects stockholders' confidence. It is calculated by dividing the market price per share by the earnings per share. A high P/E ratio suggests greater confidence in the stock.
Step-by-step explanation:
The price/earnings ratio of a stock reflects stockholders' confidence. The price/earnings ratio (P/E ratio) is a financial metric that compares a company's stock price to its earnings per share. It is calculated by dividing the market price per share by the earnings per share.
The P/E ratio is used by investors to evaluate the valuation of a stock and determine if it is overvalued or undervalued. A high P/E ratio suggests that investors have higher expectations for the future earnings of the company, indicating greater confidence in the stock.
For example, if a company's stock is trading at $50 per share and its earnings per share is $5, the P/E ratio would be 10 ($50 / $5 = 10). This means investors are willing to pay 10 times the earnings for each share of the company's stock, indicating higher confidence.