Question

A profitable high-tech company would generally have: a. high price-to-book ratio and high price-to-earnings ratio. b. high price-to-book ratio and low price-to-earnings ratio. c. low price-to-book ratio and high price-to-earnings ratio. d. low price-to-book ratio and low price-to-earnings ratio.

Answer 1

A profitable high tech company would generally have a. high price-to-book ratio and high price-to-earnings ratio.

As the book value for tech companies is generally low due to lesser amount of fixed assets in the operation. So, the price to book value is generally higher.

It is given that the company is profitable. So, the investors would generally expect the tech company to have good prospects in the future and thus would be willing to pay higher for same amount of earnings. Thus the price to earnings would be high.