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P/E Ratio, Matching Revenues and Expenses

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Why might a firm trade at a price-to-book ratio greater than 1.0. Explain why some firms have high price-earnings ratios? And also give examples in which there is poor matching of revenues and expenses.

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The response provides you a structured explanation of the reasons for high P/E ratio and examples of mismatching revenues and expenses. It also gives you the relevant references.

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There are several reasons why a firm might trade at a price to book ratio greater than 1.0. Some firms might have high price earnings ratios because of the following reasons. The market sentiment may keep the price of a stock artificially high. Further, a firm may trade at a P/E ratio greater than 1.0 because th short term results of the company are better than expected, technical factor may push up the prices, or material news about the company may cause a firm to trade at a price to book ratio greater than 1.0. There are other reasons that push the P/E ratio greater than 1.0. These include high liquidity of stocks, ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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