P/E

it measures the relationship between the market price of a share and the earning per share. its calucation involves the use of the share price which is a reflection of hte market's expectations of the future earnings performance, and the historic level of earnings

IF A has just suffered an abnormally bad year's profit performace which is not epxented to be repeated, the market will price the share on the basis of its expected future earnings. The earnings figure used to calculate the ratio will be the historical figure which is lower than that forecst for the future. and thus the ratio will appear high.

Financial gearing

The financial gearing of hte firm expresses the relationship between debt and equity in the capital structure. A high of gearing means that there is a high of debts to equity. This means that the company carries a high fixed interest charge, and thus the amount of earnings available to equity will be more variable from year to year than in the company with a lower gearing level. This the shareholders will carry a higher level of risk than in a company with lower gearing. All other things being equalm it is therefore likely that the share price in a highly geared company will be lower than that in a low geared firm.

The historical P/E retio is dependent on the current share price and historical level of earnings. A high P/Eratio is therefore more likely to be found in a company with low gearing than in one with high gearing. In the case of A the high P/E ratio is more prbable attributable to the depressed level of earnings than to the financial structure of hte company.