On Capital Market Ratios and Stock Valuation: A Geometric Approach

18 Pages Posted: 25 Aug 2009 Last revised: 9 Nov 2009

See all articles by A. K. M. Azhar

A. K. M. Azhar

Universiti Putra Malaysia

Suzana Idayu Wati Osman

affiliation not provided to SSRN

R. A. Parinduri

Nottingham University Business School, Malaysia Campus

Date Written: August 24, 2009

Abstract

This paper presents a new technique for the empirical analysis of some capital market ratios and stock valuation. We first show how capital market ratios (such as the price to earning ratio) can be plotted in a constructed stock valuation box. Within the box we can also plot the contours of several associated valuation measures. Analysis of the properties of the traditional capital market ratio (the price earnings ratio, PER) suggest that they should be supplemented by a new index, the PERS (value ratio) index. We show how changes in the value of PERS are associated with changes in the ratio of the current earnings of the firm to the sum of value of the firm and current earnings, and how this may alter our economic interpretation of changes in the patterns and direction of stock values. We do also some empirical analyses to show that the new measure of PERS is better the the traditional one.

Keywords: price to earnings ratio, stock valuation box, value ratio index, stock valuation

JEL Classification: G11, G12, G19

Suggested Citation

Azhar, A. K. M. and Osman, Suzana Idayu Wati and Parinduri, Rasyad A., On Capital Market Ratios and Stock Valuation: A Geometric Approach (August 24, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1460594 or http://dx.doi.org/10.2139/ssrn.1460594

A. K. M. Azhar (Contact Author)

Universiti Putra Malaysia ( email )

43400 UPM Serdang
Selangor
Serdang, Selangor 43400
Malaysia

Suzana Idayu Wati Osman

affiliation not provided to SSRN ( email )

Rasyad A. Parinduri

Nottingham University Business School, Malaysia Campus ( email )

Wisma MISC
No. 2 Jalan Conlay
Kuala Lumpur, Selangor 43500
Malaysia

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