The P/E ratio is not useful when the firm's ________ are negative.In this case,it is common to look at the firm's ________ relative to sales.
A) operating earnings; enterprise value
B) net earnings; enterprise value
C) operating earnings; market value
D) net earnings; market value

Question

Quizplus · Accepted Answer

The P/E ratio is calculated by dividing the market price per share by the net earnings per share of the company. When the firm's earnings are negative or there are no earnings, the P/E ratio becomes insignificant. In such cases, analysts typically look at the enterprise value, which is the company's total value (including debt and equity) minus its cash and short-term investments, relative to its sales, to determine the firm's value. Hence, the best choice is B, where the net earnings are used instead of operating earnings, and enterprise value is used instead of market value, as a measure of the firm's value.

The P/E Ratio Is Not Useful When the Firm's ________