Ace the CMA 2025 Challenge – Unlock Your Accounting Superpowers!

The Price-to-Earnings (P/E) Ratio is a critical financial metric used to assess a company's valuation in relation to its earnings. The correct formula, Market price per share divided by earnings per share, reflects how much investors are willing to pay for each dollar of earnings generated by the company. This ratio is particularly valuable in comparing companies within the same industry, as it helps investors to discern whether a stock is overvalued or undervalued relative to its earnings performance.

The P/E ratio serves multiple purposes, including providing insight into investor expectations about future growth based on current earnings. A high P/E ratio might indicate that investors are anticipating significant growth in earnings, while a low P/E might suggest that the market has lower expectations for the company's future performance.

In contrast, the other options do not relate to the P/E ratio. The first choice, which calculates net income divided by total assets, pertains to return on assets (ROA), a measure of how efficiently a company uses its assets to generate profit. The second choice involves dividends per share divided by the dividend payout ratio, which relates to dividend policies rather than earnings. The last option calculates operating income divided by net sales, indicating the operating margin of a business rather than its price relative to