What is the main driver of the Price-to-Earnings (P/E) ratio in market stock valuation?
ATotal retained earnings cash balance
BExpected future growth rates and risk perception
CHistorical book value of tangible assets only
DCurrent liability balances on balance sheet
Explanation
* P/E Ratio = Market Price per Share / Earnings per Share (EPS).
* High P/E ratios reflect investor expectations of strong future earnings growth and lower perceived risk.
* Low P/E can signal undervaluation or mature, low-growth sector characteristics.
Exam Relevance
- Topic: Financial Statement Analysis
- Subtopic: Valuation Ratios
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