Price Mulitples Cfa Level 1

Front 1

Advantages of P/E

Back 1

1. Earnings power highly indicative of investment value
2. Popular in investment community
3. Research shows P/E differences related to Long run stock returns

Front 2

Disadvantages of P/E

Back 2

1. Earnings can be negative (P/E useless)
2. Accounting pracitices can distort EPS

Front 3

Advantages of P/BV

Back 3

1. BV usually positive
2. More stable than EPS
3. Research shows P/BV differences related to Long run stock returns

Front 4

P/BV beneficial for analyzing...

Back 4

Firms with highly liquid assets (Financials, insurance etc...)
Firms going out of business

Front 5

Disadvantages of P/BV

Back 5

1. Do not recognize nonphysical assets such as human capital (not good for service companies)
2. Various accounting conventions can obscure true investments in the firm made by shareholders which reduce comparability (ie R&D costs expensed vs capitalized in various countries)
3. Technological change and inflation can cause BV and MV to differ greatly.

Front 6

Advantages of P/S

Back 6

1. revenue is always positive
2. Sales is not easily manipulated
3. Sales not as volatile as EPS
4. Research shows P/S differences related to Long run stock returns

Front 7

P/S is useful in analyzing...

Back 7

Distressed firms, cyclicals, start-ups

Front 8

Disadvantages of P/S

Back 8

1. High growth in sales doesnt necessarily mean high growth in EBIT
2. Do not capture differences in cost structures among companies
3. Sales can be distorted by differing revenue recognition methods

Front 9

Advantages of P/CF

Back 9

1. CF harder to manipulate than earnings
2. P/CF more stable than P/E
3. Research shows P/CF differences related to Long run stock returns

Front 10

Disadvantages of P/CF

Back 10

1. EPS + noncash charges method (NI+Dep+Amort) ignors items affecting actual CFO
2. FCFE is preferable to CF in theory but FCFE is more volatile

Front 11

Adjusted CFO

Back 11

=CFO + [(net cash interest outflow)(1-t)]