10 Year average price to earnings ratio

[johntavv]

Referring to reading 17, practice problem 15, the answer says:
The P/10-year MA(E) is dependent of changes in accounting rules because it averages earnings over 10 years. Therefore, the feature is not applicable to the model.
Isn’t this a contradiction, why is it dependent but not applicable to the model.
Schweser text says that P/10-year MA(E) does not consider the effects of changes in accounting rules or methods.

 

[Unemployed]

I think they are talking about the same thing. Since the ratio does not correct for the changes in accounting rules (that is what Scheweser refers as to “does not consider the effects”), the result depends on changes in accounting rules. If it does not depend on it, then it adjust for any of the effects that such changes might bring. However, it is not the case. Therefore, when interpeting the result of the ratio, we should know how accounting rule changed during the last 10 years.

 

[johntavv]

Got it