Which of the Following Is Not True About the P/E

question 20

Multiple Choice

Which of the following is not true about the P/E ratio?

• A) A comparison of one company with its peers also involves a great deal of subjectivity regarding company-specific characteristics.
• B) P/E ratios only work well on companies in the high growth stage of their lifecycle.
• C) P/E ratios are uninformative when companies have negative or very small earnings.
• D) The volatile nature of earnings implies a great deal of volatility in P/E multiples.

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Definitions:

Expense Account

An account that records the costs incurred by a business during a period, such as rent, utilities, and salaries.

Dividends Declared

Profits that a company's board of directors has decided to distribute to its shareholders, typically in the form of cash payments or additional shares.

Cash Account

A financial account that records cash transactions, both receipts and disbursements, within a business.

Retained Earnings

The portion of net income that is not distributed to shareholders as dividends but is kept by the company to reinvest in its core business or to pay debt.