Which of the following is NOT a limitation of the PE method of valuing stocks?
A)Stock buybacks can distort a firm's earnings.
B)Using previous earnings may not be useful for a firm that is restructuring.
C)The earnings of firms in a cyclical industry may vary dramatically depending on whether the economy is strong or weak.
D)Creative accounting may distort a firm's reported earnings.
E)All of the above are limitations of the PE method.

Question

Quizplus · Accepted Answer

All the options listed (A, B, C, D) are indeed limitations of the Price-to-Earnings (PE) ratio method of valuing stocks. Stock buybacks can affect the earnings per share by reducing the number of shares outstanding, thus potentially distorting the PE ratio. Relying on past earnings may not accurately reflect the value of a company undergoing restructuring, as its future earnings potential may be significantly different. The earnings of companies in cyclical industries can fluctuate widely with economic conditions, making the PE ratio less reliable for these firms. Creative accounting practices can also misrepresent a company's true financial health, affecting the accuracy of the PE ratio.

Which of the Following Is NOT a Limitation of the PE