Financial Industry Regulatory Authority (FINRA) Practice Exam 2026 - Free FINRA Practice Questions and Study Guide

Question: 1 / 400

ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's price-to-earnings ratio is higher, that would indicate?

ABC's sales are lower than MNO's

ABC's net income is less than MNO's

The price-to-earnings (P/E) ratio is calculated by dividing a company's current share price by its earnings per share (EPS). When two companies have the same market price and shares outstanding, the P/E ratio can indicate differing earnings performance.

A higher P/E ratio implies that investors are willing to pay more for each dollar of earnings compared to the other company. This can happen in a couple of scenarios, but typically, it suggests that the company is expected to have higher growth rates in the future or that its current earnings are relatively lower, causing the ratio to increase.

In this context, if ABC’s P/E ratio is higher than MNO’s, it often indicates that ABC has lower earnings per share relative to MNO, assuming the price remains constant. Consequently, ABC’s net income is less than MNO's, which justifies a higher valuation based on future expectations. Thus, the indication from ABC's higher P/E ratio is that its net income is indeed lower relative to that of MNO.

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ABC's net income is higher than MNO's

ABC's sales are higher than MNO's

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