Price to Earnings Ratio, Value to Book Ratio and Growth

Abstract

The PER is the most commonly used parameter in the stock market. The PER is the result of dividing the equity market value by the company’s profit after tax.

The PER depends on a number of factors, some of which are out of the company’s control, such as variations in interest rates, and others are intrinsic to the company, such as its risk, its growth and the return on its investments. The PER increases, ceteris paribus, if interest rates fall, if the company’s risk decreases, and if the company’s profit after tax increases. The PER increases with growth if the return on the company’s investments is greater than the required return to equity.

The relationship between share prices (their market value for listed companies) and their book value is the subject of considerable study by financial analysts. We analyze the relationship between the two parameters in several companies and different countries. We also analyze the influence of the PER and on this relationship.

Keywords: value, price, book value, market value, PER, Price to Book

JEL Classification: G12, G31, M21