Question

A rationale for the use of price-to-sales (P/S) approach is: (Select the best answer below.)

A. P/S ratios assess cost structures accurately.
B. Sales are more volatile than earnings.
C. Revenues are less subject to acounting manipulation than earnings

Answer 1

The best answer for the use of price-to-sales ratios is that revenues are less subject to accounting manipulations than earnings, providing a clearer picture of a company's revenue generation.

Step-by-step explanation:

A rationale for the use of price-to-sales (P/S) ratios is that revenues are less subject to accounting manipulation than earnings. Unlike earnings, which can be affected by various accounting practices and non-cash expenses, sales figures are more straightforward and provide a clearer picture of the cash flowing into a company. This characteristic of sales makes P/S ratios a valuable metric for analyzing companies, especially those that are not yet profitable or have volatile earnings.