Question

A low P/E for a stock indicates that:

A. people may expect earnings to fall in the future, perhaps because the firm will be faced with increased competition.
B. its dividends have been low so that no one is willing to pay very much for it.
C. the corporation is possibly overvalued.
D. All of the above are correct.

Answer 1

Answer:

(A). People may expect earnings to fall in the future, perhaps because the firm will be faced with increased competition.

Explanation:

Price Earnings ratio of a company represents market price per share of a company's stock in relation to it's earnings per share.

Price Earnings ratio(PER) is given by the following formula:

PER = $\frac{Market\ Price\ Per\ Share}{Earnings\ Per\ Share}$

A lower P/E Ratio indicates that a company's market price of a share is lower relative to it's earnings. This means the company's stock is undervalued.

It can also mean that the company's earnings have increased which in turn has increased it's earnings per share.  

Investors in general expect lower earnings in future for the stock of a company with low P/E Ratio.