Canadian Securities Course (CSC) Practice Exam 2025 – The Comprehensive All-in-One Guide to Exam Success!

The price-to-earnings (P/E) ratio is a financial metric that reflects an investor's expectations about future earnings growth. It is calculated by taking the current price of a company's stock and dividing it by its earnings per share (EPS). A higher P/E ratio often suggests that investors are anticipating strong future growth in earnings relative to its current earnings. This can happen when the market believes a company has significant potential for expansion or improved profitability, thus justifying a higher price for its shares today.

Investors use the P/E ratio to compare the valuation of companies within the same industry and to gauge if a stock is overvalued or undervalued based on their growth prospects. When companies exhibit strong earnings growth, their P/E ratios tend to increase as investors are willing to pay a premium for potential future profits.

While net income represents a company’s profitability, it does not directly convey investor expectations about future growth. Intrinsic value, on the other hand, refers to an estimated true value of a company based on fundamental analysis, which does not necessarily reflect market expectations. Market capitalization simply indicates the total market value of a company's outstanding shares and does not provide insights into earnings growth expectations.