Question

The pitfalls of price-earnings analysis include all of the following except The denominator in the ratio...

The pitfalls of price-earnings analysis include all of the following except

The denominator in the ratio is accounting earnings

Reported earnings can fluctuate over the course of a business cycle

Flexibility in accounting rules can be used to manipulate operating earnings

None of the above
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Answer #1

The correct answer is "None of the above"

The reason is that all of the above mentioned 3 options are pitfalls of price-earning analysis.

1. One of the biggest drawback of using P/E ratio is that it uses the accounting earnings and not the cash earnings.

2. Accounting earnings reported can highly fluctuate over the course of a business cycle. There may also be one-time gains recognized which unnneccesarily inflate the earnings.

3. Earnings is computed using the accounting rules and principles which can be easily manipulated.

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