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.
