Comment on the view that the price/earnings (P/E) ratio is an “attempt to value a company in terms of its earnings”.

CPA-Financial-Management-Section-3 Revision kit

A P/E ratio may be established and used as a method of valuing the shares of an unquoted company, but it is a facility to read too much significance into the P/E ratio or quoted companies. The EPS is determined the success (or otherwise) of a company‟s
management, and the share price on the market is determined many factors (dividends, growth prospects, government policy, the economic situation e.t.c.) of which the EPS is only one. The P/E ratio is therefore an interesting and useful measure of comparison, but it does not of itself possess any inherent significance which is used investors to fix share prices.

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