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A growth adjusted price-earnings ratio

Author

Listed:
  • Graham Baird
  • James Dodd
  • Lawrence Middleton

Abstract

The purpose of this paper is to introduce a new growth adjusted price-earnings measure (GA-P/E) and assess its efficacy as measure of value and predictor of future stock returns. Taking inspiration from the interpretation of the traditional price-earnings ratio as a period of time, the new measure computes the requisite payback period whilst accounting for earnings growth. Having derived the measure, we outline a number of its properties before conducting an extensive empirical study utilising a sorted portfolio methodology. We find that the returns of the low GA-P/E stocks exceed those of the high GA-P/E stocks, both in an absolute sense and also on a risk-adjusted basis. Furthermore, the returns from the low GA-P/E porfolio was found to exceed those of the value portfolio arising from a P/E sort on the same pool of stocks. Finally, the returns of our GA-P/E sorted porfolios were subjected to analysis by conducting regressions against the standard Fama and French risk factors.

Suggested Citation

  • Graham Baird & James Dodd & Lawrence Middleton, 2020. "A growth adjusted price-earnings ratio," Papers 2001.08240, arXiv.org.
    • Handle: RePEc:arx:papers:2001.08240
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    References listed on IDEAS

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    Cited by:

    1. Muhammad Usman Arshad, 2021. "Forecasted E/P Ratio and ROE: Shanghai Stock Exchange (SSE), China," SAGE Open, , vol. 11(2), pages 21582440211, June.

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