Abstract:
Purpose: 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).
Design/methodology/approach: 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.
Findings: 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.
Practical implications: Dividend payout ratio and leverage ratio have positive
correlation with price earnings ratio. Their significant values are less than the test
alpha values. Therefore, the researcher can accept the alternative hypothesis. 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.
