Question

What actions could a manager take to try to positively impact the price-earnings ratio?

Answer 1

Answer:-Price-earning ratio (PE) is the measure to analyze the valuation of stocks and shows the rise or fall of the company stock price at any given point of time. It is calculated by dividing the company's current stock price by its earnings per share.

Steps used by the manager to positivity impact the price-earning ratio are-

1. Growth in sales:- It is considered one of the primary factors that positively impact the P/E ratio. If a company is earning well and making good sales, then investors are willing to pay high prices for those growing stocks rather than non-growing stocks.

2. Improving profit margin:- After making good sales it is important to check the profit margin, this will give an idea of how well the company is handling its finances overall because the market always prefers companies that are at profit.

3. Reduction of debt:- Higher debt means greater financial risk so it is important to lower debt that will help to reduce other financial charges. Thus giving more potential to shareholders.

4. Return on equity:- By lowering the debt and equity base the company will tend to have high ROE. Shareholders will pay a high price only if the company is able to maintain good ROE.

5. Building brand and reputation:- P/E ratio is also impacted by intangibles like reputation and branding. These are the key factors in selecting a higher P/E ratio for the selected stock.

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