Which statement best describes a high price-earnings ratio situation?

Which statement best describes a high price-earnings ratio situation?

• A. The stock's price is high relative to its earnings per share
• B. The stock is guaranteed to rise
• C. The company has no dividends
• D. The stock's price is always stable

Answer: (A)

A high price-earnings ratio means the stock’s price is high relative to its earnings per share. The P/E ratio shows how much investors are willing to pay for each dollar of current earnings, so a large number indicates the price per share is expensive compared with the company’s earnings. This often reflects optimism about future growth or the stock’s perceived quality, not guarantees about future performance. It also has no direct link to dividends or to price stability—companies can have high or low P/Es regardless of whether they pay dividends, and stock prices can move up or down even with a high P/E.

A high price-earnings ratio means the stock’s price is high relative to its earnings per share. The P/E ratio shows how much investors are willing to pay for each dollar of current earnings, so a large number indicates the price per share is expensive compared with the company’s earnings. This often reflects optimism about future growth or the stock’s perceived quality, not guarantees about future performance. It also has no direct link to dividends or to price stability—companies can have high or low P/Es regardless of whether they pay dividends, and stock prices can move up or down even with a high P/E.