Which of the following statements about the Price/Sales ratio is true?

Question

Quizplus · Accepted Answer

The statement that "It can be misleading if you are valuing a firm within an industry that is using a different strategy from most other firms in the industry--e.g., a firm targeting low-volume, high-profit margins in an industry that typically goes for high volume, lower margins" is true. Choices A and B are incorrect because a higher Price/Sales ratio may not necessarily make the investment more attractive, and the Price/Sales ratio is not subject to the 1/X problem. Therefore, the correct answer is C. The Price/Sales ratio can be misleading if a firm is using a different strategy and targeting a different segment within an industry, as compared to other firms in the industry. The other options are incorrect - a higher Price/Sales ratio does not necessarily make an investment more attractive (option A), and the Price/Sales ratio is not subject to the 1/X problem (option B).

Which of the Following Statements About the Price/Sales Ratio Is