What types of companies have a high PE ratio and a low market-to-book ratio

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Financial  ratios are important when completing investments because they help  stakeholders assess and analyze a companyàperformance and projection.  Financial analysis is an essential part of the decision-making process.  Typically, investors hope to buy stocks at low points and sell them at  peaks. A companyàprice-earnings and market-to-book ratios reflect the  best times to purchase and sell stocks. 

According to a study  published by Iqra University, a firmàprice-earnings ratio is  calculated by dividing the stockàmarket price by earnings per share  (Khan, 2009, pp. 106). A high PE ratio can indicate a growing or  overvalued stock. Typically, faster-growing companies have a higher  price-earnings ratio. This means that investors are more likely to pay  more for shares. An example of a fast-growing company is a technology  firm (Murphy, 2022, para. 4). To determine whether the market position  of a stockàvalue is correct, it can be compared to other industry  prices. Thus, a high price-earnings ratio allows investors to determine  companies that will benefit from changes in the economic cycle (Murphy,  2022, para. 14). Additionally, investors can detect overvalued stocks  that can be sold for profit and undervalued stocks that should be bought  for profit (Basu, 2016, para. 1).

On the other hand, the  market-to-book ratio is defined as market price per share divided by  the book value per share(Khan, 2009, pp. 107). Companies with a low  market-to-book ratio typically experience higher returns. This ratio  helps investors determine the value of a company by comparing net assets  (actual worth) to current market value. Companies operating in  industries with fewer physical assets (like the technology sector) tend  to have a lower ratio. Overall, high price-earnings and low  market-to-book ratios indicate fast-growing companies that project  successful returns for investors. 

References: 

Basu, C. (2016, October 26). High price-earnings & a low market-to-book ratio. Small Business – Chron.com. Retrieved February 16, 2023, from https://smallbusiness.chron.com/high-priceearnings-low-markettobook-ratio-21646.html 

Kenton, W. (2022, December 19). Understanding the book-to-market ratio. Investopedia. Retrieved February 16,  2023, from https://www.investopedia.com/terms/b/booktomarketratio.asp 

Khan, M. I. (2009). Price Earning Ratio and Market to Book Ratio.

Murphy, C. B. (2022, November 9). Assessing a stock’s future with the price-to-earnings ratio and Peg. Investopedia. Retrieved February 16, 2023, from https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/#:~:text=A%20high%20P%2FE%20ratio%20suggests%20that%20investors%20see%20it,Es%2C%20such%20as%20technology%20companies.