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Question 2 [16] The P/E ratio is arguably the most commonly used investment ratio in...

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Accounting

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Question 2 [16] The P/E ratio is arguably the most commonly used investment ratio in the world. The ratio basically informs an investor how many years it will take for the company to 'earn' back his/her initial investment, should history repeat itself. Although a P/E ratio can provide a good approximation of how expensive a particular share is relative to its underlying earnings stream, it is by no means a perfect gauge of a company's value. Required: Do you think P/E ratios should be used in isolation? Provide and explain four drawbacks of using this ratio to make informed investment decisions

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