An analyst made the following statement: “When using either price-to-earnings ratios or
price-to-cash-flow ratios, differences among companies with respect to quality of earnings are
major a major concern.” Is the analyst’s statement correct with respect to:
price-to-earnings ratios? price-to-cash-flow ratios?
A. No No
B. No Yes
C. Yes No
Solution：
B is correct. Most quality of earnings differences between companies (use of aggressive versus
conservative accounting methods) are likely to be a problem when using P/E ratios but not when
using P/CF ratios.
