In CMA Part 2, Ratios is one topic that many candidates are not comfortable with. One reason is that the same ratio may be calculated in slightly different ways by different companies or in different textbooks. Fortunately, the ICMA (the organization that administers the CMA exams) has prepared a ratio formula sheet with the official ratios for the CMA exam. If you have not already downloaded it, it is available at http://www.imanet.org/docs/default-source/generalpdfs/ratio-definitions.pdf?sfvrsn=2. We use these formulas in the HOCK materials.
The official formula sheet says that the Price/Earnings Ratio is calculated as the market price per share divided by earnings per share (EPS), but does not say whether earnings per share means Basic EPS or Diluted EPS. Because of this ambiguity, HOCK students frequently ask, “Should the P/E ratio be calculated using Basic Earnings Per Share of Diluted Earnings Per Share in the denominator?”
To answer this question, HOCK asked the ICMA for clarification, and their answer was to use Basic EPS when calculating the P/E ratios. So, remember that the P/E ratio is the market price per share divided by Basic EPS. If you see other materials use Diluted EPS, those materials are incorrect.
One final tip for studying the ratios: to help with memorizing them, we suggest that you use flash cards – if you have HOCK’s you can use those, but you can also easily make your own flash cards. The process of making flash cards will also help you learn them.
If you have any questions about the P/E Ratio or ratios in general, we are here to help.