Question

What may be a problem of comparing the P/E ratio?

1) Different industries have different average P/E ratios
2) P/E ratio does not take into account future growth prospects
3) P/E ratio can be manipulated by accounting practices
4) All of the above

Answer 1

Comparing the P/E ratio across companies can be problematic because of differing industry standards, exclusion of future growth prospects, and potential manipulation through accounting practices; therefore, all listed options contribute to the issue.

Step-by-step explanation:

The problem of comparing the P/E ratio of different companies includes several factors:

1. Different industries have different average P/E ratios, so direct comparison might be misleading.
2. The P/E ratio does not account for future growth prospects, which can affect company valuation.
3. P/E ratio can be distorted by accounting practices, which might affect earnings and thus the P/E ratio.

Therefore, the correct answer to the question would be option 4) All of the above. As the P/E ratio is a snapshot of company value at one moment in time, it doesn't fully capture all the nuances of a company's potential value or performance.