How should Investors interpret price-earnings ratios?

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How should Investors interpret price-earnings ratios?



Answer: You can think of a share's value as the sum of two parts - the value of the assets in place and the PRESENT VALUE OF GROWTH OPPORTUNITIES, that is, of future opportunities for the firm to invest in high-return projects. The PRICE-EARNINGS (P/E) RATIO reflects the market's assessment of the firm's growth opportunities.

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