Which of the following might cause a firm's P/E ratio to fall?
I. Earnings increases in line with past expectations.
II. The industry faces increased competition.
III. Inflation and interest rates rise.
IV. The overall market multiple rises.

Question

Quizplus · Accepted Answer

An increase in competition (II) can reduce future growth prospects, leading to a lower P/E ratio. Rising inflation and interest rates (III) can decrease the present value of future earnings, also reducing the P/E ratio. Earnings increasing in line with expectations (I) typically wouldn't affect the P/E ratio significantly, but if expectations were high, it might still cause a decrease. An overall market multiple rise (IV) would generally increase P/E ratios, not decrease them.

Which of the Following Might Cause a Firm's P/E Ratio