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Basic Question 3 of 4
Which of the following statements is the LEAST ACCURATE with respect to the rationales of using the price to sales (P/S) ratio for valuation purpose?
B. While it is possible for earnings to be negative, sales are always positive, and thus P/S can be used even during periods of accounting losses.
C. It is more unlikely to manipulate sales figures than it is for earnings and book value, and thus P/S should be used.
D. While EPS reflects company choices regarding operating and financial leverage, sales are generally independent of such choices and thus the P/S ratio is a much better ratio for comparison purpose.
A. The P/S ratio may be misleading if used for cyclical companies.
B. While it is possible for earnings to be negative, sales are always positive, and thus P/S can be used even during periods of accounting losses.
C. It is more unlikely to manipulate sales figures than it is for earnings and book value, and thus P/S should be used.
D. While EPS reflects company choices regarding operating and financial leverage, sales are generally independent of such choices and thus the P/S ratio is a much better ratio for comparison purpose.
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Learning Outcome Statements
calculate and interpret alternative price multiples and dividend yield;
calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;
explain and justify the use of earnings yield (E/P);
describe fundamental factors that influence alternative price multiples and dividend yield;
calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;
calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;
evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;
calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;
calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;
explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;
calculate and interpret EV multiples and evaluate the use of EV/EBITDA;
CFA® 2025 Level II Curriculum, Volume 4, Module 23.