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Stocks 402: Using Ratios and Multiples

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1.
An advantage to using the price/sales ratio is that sales are cut-and-dried.
Choose wisely. There is only one correct answer.
True. Sales are more straightforward and harder to manipulate than earnings.
2.
A company's price/earnings ratio is most meaningful when it is compared with which of the following?
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Its historical P/E ratio. A company's P/E ratio is most meaningful when it is compared with its historical P/E ratio. The most useful way to use a P/E ratio is to compare it with a certain benchmark. Good benchmarks are the P/E of another company in the same industry, the P/E of the entire market, or the P/E of the same company at a different point in time. It would not be very meaningful to compare a company's P/E ratio with its P/S ratio or historical P/B ratio, because the latter two metrics are used to measure different aspects of the company's performance (sales and book value) relative to its stock price.
3.
In a typical price/book ratio, what exactly is the book value part of it?
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The total equity divided by the number of shares outstanding. Altogether, this is the "book value" that purports to show what a share of stock is objectively worth.
4.
A stock with a high dividend yield is a good bargain for an income investor to buy.
Choose wisely. There is only one correct answer.
Maybe. A dividend yield can be high for many reasons, either good or bad. On the bad side, the stock price might be dropping deeply due to financial troubles; that could proportionately raise the dividend yield. Caution is always key.
5.
If a stock has a price/earnings ratio of 20, based on a price of $100 and an earnings per share of $5, its earnings yield is _______.
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5%. Earnings yield can be gotten by inverting the price/earnings ratio.
6.
Why should you be wary of using the cash return measurement for evaluating foreign companies?
Choose wisely. There is only one correct answer.
They may have different definitions of cash flow. In other words, what they call cash flow and what we call cash flow may be two different things, thus skewing the usefulness of the measurement.
7.
A company's price/earnings growth ratio uses _______.
Choose wisely. There is only one correct answer.
Future estimates. The price/earnings growth ratio is used to get a sense of what a company will be like in the future.