Content area
Full Text
Abstract
PE ratio is the one of the important tools used by the investor to take investment decision in capital market. To take right decision it is not only necessary to know about PE of particular stock but also the different factors which are having impact on PE ratio. For the purpose of study 30 companies which are included in the sensex are taken. The study results shows that the P/E ratio of the public sector companies always tend to be higher than that of the private sector companies. The market capitalization of the companies has a great impact over the P/E ratio. Further, it could be said that the P/E ratio could not be predicted accurately using the past information and only the future expectations of the investors decide the P/E ratio of a company.
Key words:
Determination of PE ratio, Determinants of PE ratio, Impact of market capital on PE, Determinants of PE using constant growth model and whitebeck kisor model.
Among the financial ratios from the viewpoint of stock selection, the P/E ratio occupies the most important place. Interestingly, one of the books written by Peter Lynch to share his experiences about how he achieved great investment success is titled as Learn to Earn: A Beginner's Guide to Basics of Investing and Business in which he has stated that, of course there are many things to be learned step by step but basic requirement is understanding about P/E ratio. Investors and stock analysts have used priceearnings ratio for quite long time, (usually called P/E ratio), to determine whether individual stocks is reasonably priced or not. More recently, some economists have argued that the average price-earnings ratio for a stock market index can help to predict long-term changes in that index. According to this view, a low P/E ratio tends to be followed by rapid growth in stock prices in the subsequent decade and a high P/E ratio by slow growth in stock prices. As PE is the important factor used by the investors to take decision, it is necessary to determine the factors which influence the PE ratio of company to take better decision.
Computation of P/E Ratio
The P/E is the relationship between the stock price and the company's...