An Empirical Study on Determinants of Price Earnings Ratio: Evidence from Listed Food, Beverage and Tobacco Companies in Colombo Stock Exchange

Abstract

The Price earnings ratio compares a stock’s price to earnings. By showing the relationship between a company’s stock price and earnings per share (EPS), the Price earnings ratio helps investors to value a stock and gauge market expectations. The ratio is affected by several factors that are responsible for the variations of Price earnings ratio. These variations of Price earnings ratio have significant impact on investor’s perception. This paper attempts to identify the factors and the relationships between the factors and Price earnings ratio of food, beverage, and tobacco companies in Colombo Stock Exchange (CSE). Based on simple sampling, data were taken for this purpose from annual reports of 30 food, beverage, and tobacco companies listed on the CSE for the five-year period from 2015 to 2019. The study focuses on secondary data collected through the published annual reports of the sample. Descriptive statistics, correlation analysis and multiple regression analysis are used to accomplish the objective of this paper. Results revealed that dividend payout ratio and leverage ratio are significant determinants of Price earnings ratio where these both variables have positive influence on Price earnings ratio. Furthermore, return on equity and earnings per share are negative insignificant determinants of Price earnings ratio. Dividend payout ratio and leverage ratio have positive correlation with price earnings ratio. It can be statistically concluded that dividend payout ratio and leverage ratio have positive significant relationship with price earnings ratio. Return on equity and earnings per share have negative correlation with price earnings ratio. Significant values are higher than the test alpha values. Therefore, the researcher can reject the alternative hypothesis. It can be statistically concluded that return on equity and earnings per share have negative insignificant relationship with price earnings ratio. This paper is evidence for fundamental analysts and decision makers to evaluate determinants that explain variations in P/E ratio of food, beverage, and tobacco companies in Sri Lanka.