Which statement correctly describes the earnings-related ratios EPS and P/E?

• A. They are both earnings-related ratios commonly examined.
• B. They are liquidity ratios.
• C. They measure debt levels.
• D. They predict stock prices.

Answer: (C)

EPS and P/E focus on earnings, not on liquidity or debt. EPS (earnings per share) shows how much profit belongs to each share of stock, giving a sense of profitability on a per-share basis. P/E (price-to-earnings) compares the market price of a share to its earnings per share, indicating how much investors are willing to pay for a dollar of earnings and helping gauge valuation.

They are commonly examined because they provide insight into a company’s profitability and how the market values that profitability. They are not liquidity ratios, which assess the ability to meet short-term obligations, nor do they measure debt levels—that would be leverage or solvency metrics. They also don’t directly predict stock prices; while P/E helps assess whether a stock is fairly valued relative to its earnings, actual prices are influenced by many factors beyond these ratios.