QBank Question 96399 (Price/Sales Ratios) framework, management, sales, advantage

burning0spear

Shouldn’t the question have said “Most Likely”?
Which of the following is least likely an advantage of using price/sales (P/S) multiple?
A) P/S multiples are more reliable because sales data cannot be distorted by management.
B) P/S multiples provide a meaningful framework for evaluating distressed firms.
C) P/S multiples are not as volatile as P/E multiples and hence may be more reliable in valuation analysis.
Your answer: C was incorrect. The correct answer was A) P/S multiples are more reliable because sales data cannot be distorted by management.
Accounting data on sales is used to calculate the P/S multiple. The P/S multiple is thought to be more reliable only because sales figures are not as easy to manipulate as the earnings and book value, both of which are significantly affected by accounting conventions.

farrukhsadiq

The question is framed correctly, but not the explanation is a bit clumsy.
A) P/S multiples are more reliable because sales data cannot be distorted by management.
Sales data CAN be distorted by management (Enron, WorldCom,..), though less easily than Earnings.
It is MORE reliable, but not bulletproof therefore the answer Least likely advantage.
The other two answers are correctly described and are advantages.