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Decomposing the price-earnings ratio

Author

Listed:
  • Keith Anderson
  • Chris Brooks

    (Faculty of Finance, Cass Business School, City University)

Abstract

The price-earnings (P/E) ratio is a widely used measure of the expected performance of companies, and it has almost invariably been calculated as the ratio of the current share price to the previous year's earnings. The P/E of a particular stock, however, is partly determined by outside influences such as the year in which it is measured, the size of the company, and the sector in which the company operates. Examining all UK companies since 1975, the authors propose a modified P/E ratio that decomposes these influences. A regression is then used to weight the factors according to their power in predicting returns. The decomposed P/E ratio is able to double the gap in annual returns between the value and glamour deciles, and thus constitutes a useful tool for value fund managers and hedge funds.

Suggested Citation

  • Keith Anderson & Chris Brooks, 2006. "Decomposing the price-earnings ratio," Journal of Asset Management, Palgrave Macmillan, vol. 6(6), pages 456-469, March.
    • Handle: RePEc:pal:assmgt:v:6:y:2006:i:6:d:10.1057_palgrave.jam.2240195
    DOI: 10.1057/palgrave.jam.2240195
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    Citations

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    Cited by:

    1. Boonlert Jitmaneeroj, 2024. "Value relevance of multifaceted corporate social performance: how do country-specific factors matter?," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-20, December.
    2. Itemgenova, Aigerim & Sikveland, Marius, 2020. "The determinants of the price-earnings ratio in the Norwegian aquaculture industry," Journal of Commodity Markets, Elsevier, vol. 17(C).
    3. Almir Alihodzic, 2015. "Correlation Of Fundamental And Technical Indicators For A Particular Stock At The Banja Luka Stock Exchange," Economy of eastern Croatia yesterday, today, tommorow, Josip Juraj Strossmayer University of Osijek, Faculty of Economics, Croatia, vol. 4, pages 728-740.
    4. Kurach Radosław & Słoński Tomasz, 2015. "The PE Ratio and the Predicted Earnings Growth – the Case of Poland," Folia Oeconomica Stetinensia, Sciendo, vol. 15(1), pages 127-138, June.
    5. Sakchai Naknok, 2022. "Firm Performance Indicators as a Fundamental Analysis of Stocks and a Determinant of a Firm’s Operation," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 190-213.
    6. Pornanong Budsaratragoon & Boonlert Jitmaneeroj, 2021. "Corporate Sustainability and Stock Value in Asian–Pacific Emerging Markets: Synergies or Tradeoffs among ESG Factors?," Sustainability, MDPI, vol. 13(11), pages 1-25, June.
    7. Eachempati, Prajwal & Srivastava, Praveen Ranjan & Kumar, Ajay & Muñoz de Prat, Javier & Delen, Dursun, 2022. "Can customer sentiment impact firm value? An integrated text mining approach," Technological Forecasting and Social Change, Elsevier, vol. 174(C).

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