- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 41. Equity Valuation: Concepts and Basic Tools
- Subject 5. Multiplier Models
CFA Practice Question
Consider a cyclical industry in which many firms are not profitable. These firms have operations in many countries, such as the U.S., Germany, Brazil, and China. Which valuation method is most appropriate for comparing these companies in the industry?
A. Trailing P/E
B. P/BV
C. P/S
Explanation: P/S is more suitable for valuing firms with negative earnings and better able to compare firms in different countries that are likely to use different accounting standards.
User Contributed Comments 5
| User | Comment |
|---|---|
| Antony1 | I was debating between P/BV and P/S; I chose P/BV because it said that it was a cyclical industry where sales may fluctuate (wasn't sure if all firms react the same way to the cyclical nature of the industry). Why can you not use BV? Because of the different geographic locations? |
| alki | Because if diff acct methods are used, Book Value calculated might be diff. for companies in diff countries..... |
| ascruggs92 | ^what he said. The key part of the question that excludes P/BV is that they do business in multiple countries, therefore it is harder to compare book values due to accounting assumptions |
| khalifa92 | if u have negative earning you can compare companies with sales it's very simple because earnings are after the deduction of costs and expenses. |
| lighty0770 | dont really like the explanation as we have an entire book dedicated to adjusting IS/BS between different accounting standards to ensure comparability. |