CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

The drawbacks of using P/S ratio are:

I. Sales may show an uptrend even when a company is not profitable.
II. The ratio does not include any other valuables such as human capital.
III. The ratio may be negative and thus not meaningful.
IV. Sales tend to be more volatile than earnings.
A. I and III
B. I only
C. II, III and IV
Explanation: Drawbacks of P/S ratio:
  • Sales do not imply profits. A company should generate earnings and be cash-flow positive in the long run to stay in business. Therefore, the P/S ratio alone cannot be regarded as a sole determinant of relative value. Not every stock with a low P/S multiple will be considered an attractive investment.
  • The ratio does not capture different cost structures. Only companies with similar cost structures and business models should be considered for the comparative analysis using the P/S multiple.
  • Revenue recognition methods can distort reported sales.

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