Which ratio was primarily designed to monitor firms with negative earnings?

• A. Price-to-Sales (P/S) Ratio
• B. Earnings Per Share (EPS)
• C. Current Ratio
• D. Return on Equity (ROE)

Answer: (A)

Verified step by step guidance

1. Understand the purpose of each ratio mentioned in the problem: Price-to-Sales (P/S) Ratio, Earnings Per Share (EPS), Current Ratio, and Return on Equity (ROE).
2. Recognize that firms with negative earnings cannot use ratios that rely on net income, such as Earnings Per Share (EPS) or Return on Equity (ROE), because these ratios would be distorted or meaningless.
3. Identify that the Price-to-Sales (P/S) Ratio is designed to evaluate firms regardless of their earnings, as it uses sales revenue instead of net income in its calculation.
4. Note that the Current Ratio is a liquidity ratio and is not specifically designed to monitor firms with negative earnings; it measures a firm's ability to pay short-term obligations.
5. Conclude that the Price-to-Sales (P/S) Ratio is the most appropriate ratio for monitoring firms with negative earnings, as it focuses on sales rather than profitability.