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Price/Earnings ratio and managing earnings

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1. The price/earnings ratio is often viewed as a measurement of future earning power. Do you agree? Why or why not?

2. Corporations have been criticized for "managing earnings." What does this mean? Do you agree that it is a problem? What can be done to prevent this practice?

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Solution Preview

The price/earnings ratio can be a measurement of future earning power if it is used in the properly. The price/earnings ratio evaluates the current share price to the per share earnings. This is usually evaluated over the last four quarters. A variation of the price/earnings ratio can be used to estimate the earnings for the next four quarters. This is called a projected price/earnings ratio. Also the ...

Solution Summary

Whether or not the price/earnings ratio is a measurement of future earning power and the reasons why are discussed. What corporations managing earnings mean, whether this is a problem, and what can be done to prevent this practice are discussed.

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