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The PE Ratio and the Predicted Earnings Growth – the Case of Poland

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  • Kurach Radosław

    (Wrocław University of Economics Faculty of Economic Sciences Department of Mathematical Economics Komandorska 118/120, 53-345 Wrocław, Poland)

  • Słoński Tomasz

    (Wrocław University of Economics Faculty of Management, Computer Science and Finance Department of Public and International Finance Komandorska 118/120, 53-345 Wrocław, Poland)

Abstract

We examine the components of equity returns on the Polish capital market. To analyse the underlying complexity of returns we took into consideration the model designed by Leibowitz (1999). This model captures three factors: dividend yield, expected growth in earnings and expected change in price-to-earnings (PE) ratio. We applied this model to analyse the average discount/premium not only to particular shares but to market averages as well. Firstly, we examined the variation of PE across the companies (as adapted from Penman (1996)) to analyse the average rate of return and their striking distance of individual stocks from a ‘normal’ level. Then we checked the transitory earnings in the portfolios of high PE, whereby a fall in current earnings relative to sustainable level of earnings leads to a transitory high PE ratio. We expect that the effect of transience in current year earnings can be significant. Lastly, we analysed the individual companies in order to check what percentage of companies give a “correct” signal about future prospects.

Suggested Citation

  • 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.
    • Handle: RePEc:vrs:foeste:v:15:y:2015:i:1:p:127-138:n:4
    DOI: 10.1515/foli-2015-0022
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    References listed on IDEAS

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    4. Keith Anderson & Chris Brooks, 2006. "Decomposing the price-earnings ratio," Journal of Asset Management, Palgrave Macmillan, vol. 6(6), pages 456-469, March.
    5. Javier Estrada, 2005. "Adjusting P/E ratios by growth and risk: the PERG ratio," International Journal of Managerial Finance, Emerald Group Publishing, vol. 1(3), pages 187-203, July.
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