Georgia Assessments for the Certification of Educators GACE Practice Test

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If a stock has a high P/E ratio, this means that:

  1. The compañy's earnings per share are high

  2. The stock pays a high dividend based on its earnings per share

  3. The stock's price is high considering the value of its earnings per share

  4. The stock's price is low considering the value of the company's earnings

The correct answer is: The compañy's earnings per share are high

A high P/E (price-to-earnings) ratio indicates that the stock's price is high relative to its earnings per share. This means that investors are willing to pay more for each unit of earnings, often reflecting their expectations for future growth. Consequently, a high P/E ratio typically suggests that the market has high expectations for the company's future profitability, possibly due to anticipated growth or other positive factors driving investor sentiment. The correct understanding highlights that the high P/E ratio is a comparison of the stock's price to its earnings, rather than an indication of high earnings themselves.

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