CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

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?

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.
Correct Answer: A

The rationale for using P/S for cyclical companies is even stronger. While it is true that sales will fluctuate for a cyclical company, other metrics such as earning will fluctuate even more, often times being negative. In such cases, the P/S ratio would be more reliable than P/E.

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