Question #139
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 49
Status: Unattempted
Question
Bill Whelan and Chad Delft are arguing about the relative merits of valuation metrics. Whelan: "My ratio is less volatile than most, and it works particularly well when I look at stocks in cyclical industries." Delft: "The problem with your ratio is that it doesn't reflect differences in the cost structures of companies in different industries. I like to use a metric that strips out all the fluff that distorts true company performance." Whelan: "People can't even agree how to calculate your ratio." Which valuation metric do the analysts most likely prefer? Whelan Delft
Answer Choices:
A. Price/book EV/EBITDA
B. Price/cash flow Price/book
C. Price/sales Price/cash flow
Explanation
The price/sales ratio is not very volatile, and it is of particular value when dealing with
cyclical companies. The price/cash flow ratio considers the stock price relative to cash
flows, ignoring the noncash gains and losses that can skew earnings. A major weakness of
the price/cash flow ratio is the fact that there are different ways of calculating it, making
comparisons difficult at times.