CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

Among a company's price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash-flow (P/CF) ratios, it is most accurate to state that P/E ratios are generally more stable from period to period than ______.
A. P/CF ratios but not P/S ratios
B. P/S ratios but not P/CF ratios
C. neither P/S ratios nor P/CF ratios
Explanation: Both sales and cash flow tend to be more stable than earnings, making the multiples based on sales and cash flow more stable than those based on EPS.

User Contributed Comments 3

User Comment
jcsk why? I thought the accounting numbers would be more stable because of accruals smoothing effect.
lighty0770 Dont necessarily agree with this. Thinking about the DCF, the farther you go down the waterfall, the more risky (unstable) the cash flows become (hence the increase in WACC as you flow through the cash flow levels). Sales, being the least risky, EBITDA being relatively more risky, and assuming ending with FCFE, FCFE being the most risky.

Generally when talking about earnings I would think NI, EBITDA, EBIT etc. which is above ending net cash flow therefore I would say P/E are more stable than P/CF but not P/S.

This also does not consider the cyclicality of an industry, which was a huge portion of what this study section was focused on (i.e. a biotech's firm sales are less "stable" period over period than a grocery store. Probably overthought this but just my 2 cents.
dbalakos Guys I think the point is that Income has the most operating and financial leverage compared to Sales and CF. Imagine that if Sales are reduced by a small amount Net Income might be halved because we have fixed expenses like depreciation, interest etc. In the CF on the other hand we add make adjustments for expenses to depict reality of cash flows making them more realistic and less variable. So I think the answer is right.
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