Certified Management Accountant Practice Exam 2025 - Free CMA Practice Questions and Study Guide

The price-earnings (P/E) ratio is a financial metric used to evaluate a company's valuation by comparing its current share price to its earnings per share (EPS). The correct alternative formula for the P/E ratio expresses this relationship as the total market price of the company's equity divided by its total earnings. This formulation highlights how much investors are willing to pay for each unit of earnings, providing insight into market expectations for a company's future growth and profitability.

By dividing the total market price of the company's shares by the total earnings, this formula captures the fundamental concept of the P/E ratio: it indicates whether the stock is overvalued or undervalued based on its earnings performance. A higher ratio suggests that the market expects future growth, while a lower ratio may indicate the opposite or suggest that the stock is undervalued relative to its earnings.

The other formulations do not reflect the standard understanding of the price-earnings ratio. For instance, dividing total earnings by total dividends does not relate to how stock prices and earnings are assessed. Similarly, using total revenues instead of total earnings in any context also deviates from the accepted definition of the P/E ratio. Thus, the emphasis remains squarely on comparing market price to earnings to derive insights about