Answer:
A. how much an investor is willing to pay for $1 of earnings.
Step-by-step explanation:
The formula used to calculate the price earnings ratio (PE) = market price of the stock / earnings per stock. E.g. a company that earns $2 per stock and its stock is worth $50 has a PE ratio = $50 / $2 = 25.
The higher the PE ratio, the higher the expected growth rate. Earnings of a company that has a PE ratio of 25 should grow at a much higher rate than a company with a PE of 10.
A very high PE ratio can mean that:
- the company's growth rate is very high
- the company's stock is overvalued
Investors generally compare a company's PE ratio against the industry's average, e.g. the average PE ratio of companies that list in the S&P 500 is between 13-15.