An article in the Wall Street Journal contained the following; " Burberry Group issued a surprise profit warning on Tuesday....
The announcement sent the Burberry's stock down to 21%.
What is the relationship between a firm's profits and its stock price?
Earnings per share
Earnings per share (EPS) is a profitability ratio that measures how much each shareholder would earn from a portion of the company's net income. It is used to value the relative stock price of the firm as a higher EPS would result in an increase in a company stock value.
Answer and Explanation:
Company profit and shares has a strong relationship as the former is the major driver of the former's future price. A higher profit implies that the company is growing significantly which increased its market value resulting in an increase of its stock price and vice versa. Therefore, the announced profit warning by the Burberry Group indicates a lower profit in the near future which caused its stock to declined by 21%.
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Learn more about this topic:
from Introduction to Business: Homework Help ResourceChapter 24 / Lesson 14