PE Ratios, PEG Ratios, and Estimating the Implied Expected Rate of Return on Equity Capital

2004 ◽  
Vol 79 (1) ◽  
pp. 73-95 ◽  
Author(s):  
Peter D. Easton
Keyword(s):  
A Priori ◽  
Equity Capital ◽  
Rate Of Change ◽  
Rate Of Return ◽  
Forecast Horizon ◽  
Return On Equity ◽  
Earnings Growth ◽  
Short Run ◽  
Downward Bias ◽  
Pe Ratio

I describe a model of earnings and earnings growth and I demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital. These estimates are compared with estimates of the expected rate of return implied by commonly used heuristics—viz., the PEG ratio and the PE ratio. Proponents of the PEG ratio (which is the price-earnings [PE] ratio divided by the short-term earnings growth rate) argue that this ratio takes account of differences in short-run earnings growth, providing a ranking that is superior to the ranking based on PE ratios. But even though the PEG ratio may provide an improvement over the PE ratio, it is arguably still too simplistic because it implicitly assumes that the short-run growth forecast also captures the long-run future. I provide a means of simultaneously estimating the expected rate of return and the rate of change in abnormal growth in earnings beyond the (short) forecast horizon—thereby refining the PEG ratio ranking. The method may also be used by researchers interested in determining the effects of various factors (such as disclosure quality, cross-listing, etc.) on the cost of equity capital. Although the correlation between the refined estimates and estimates of the expected rate of return implied by the PEG ratio is high, supporting the use of the PEG ratio as a parsimonious way to rank stocks, the estimates of the expected rate of return based on the PEG ratio are biased downward. This correlation is much lower and the downward bias is much larger for estimates of the expected rate of return based on the PE ratio. I provide evidence that stocks for which the downward bias is higher can be identified a priori.

scholarly journals CAUSALITY OF RISKS, COST OF EQUITY AND SHADING OF THE ENTERPRISE INCOME

2020 ◽  
Vol 6 (2) ◽  
pp. 61-68
Author(s):  
Oleh Tereshchenko ◽  
Nataliia Babiak
Keyword(s):  
Shadow Economy ◽  
Equity Capital ◽  
Rate Of Return ◽  
Cost Of Equity ◽  
Tax Havens ◽  
Return On Equity ◽  
Return On Capital ◽  
Pattern Comparison ◽  
Business Conditions ◽  
Official Declaration

The scandals with concealment of income by large companies in tax havens, the unresolved problem of estimating the size of the shadow economy, and its high share in emerging markets (EM) make issues of the methodology for calculating the shadow income of enterprises relevant for today. The aim of the study is to substantiate the method for calculating the scope of shadowing of legal business income based on the method of shadow rates of costs on invested (equity) capital. The authors construct a two-factor linear regression, which enables to test the hypothesis of the effect of the expected rate of return and return on equity at the shadow economy level. The regression analysis confirms a negative correlation between ROE and the shadow economy level. There is a positive correlation between the risks of investing in equity, which are reflected in the expected rate of return on capital, and the total income shadowing. The regression-correlation analysis of the dependence of the shadow income of enterprises on these factors confirms a similar pattern. Comparison of the obtained values of the shadow income of enterprises in Ukraine with alternative estimates of the shadow economy reveals a higher sensitivity of the proposed method to changes in country risks, as well as to decisions aimed at improving business conditions. It is confirmed that the exacerbation of risks automatically reflects on the expectations regarding the return on investment and on the official declaration of income. Therefore, the shadow economy reduction is related directly to a set of measures aimed at minimizing the risks of business activities.

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

2015 ◽  
Vol 15 (1) ◽  
pp. 127-138
Author(s):  
Radosław Kurach ◽  
Tomasz Słoński
Keyword(s):  
Normal Level ◽  
Capital Market ◽  
Average Rate ◽  
Equity Returns ◽  
Rate Of Return ◽  
Future Prospects ◽  
Earnings Growth ◽  
The Individual ◽  
Pe Ratio ◽  
Correct Signal

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.

scholarly journals Exploring the Tourism-Poverty Alleviation Nexus in the Brics Groupof Nations

Ekonomika ◽  
2020 ◽  
Vol 99 (1) ◽  
pp. 93-109
Author(s):  
Rufaro Garidzirai ◽  
Tafadzwa Matiza
Keyword(s):  
Poverty Alleviation ◽  
Positive Impact ◽  
A Priori ◽  
Control Variable ◽  
Household Consumption ◽  
Positive Sign ◽  
Series Data ◽  
Long Run ◽  
Short Run ◽  
Tourism Arrivals

The tourism-poverty alleviation nexus is becoming an increasingly significant subject of academic inquiry within the tourism economics discourse. Using time series data from the World Bank (1995–2017) in a P-ARDL model, the present study explores the relationship between tourism (receipts from exports, the travel subsector, hospitality and accommodation subsector) and poverty alleviation (final household consumption) with tourism arrivals as the control variable within the context of the BRICS group. The results suggest that receipts from the travel subsector and exports met the a priori expectation – positively influencing poverty alleviation within BRICS nations in the long run. Contrastingly, receipts from the hospitality and accommodation subsector did not meet the a priori expectation of a positive sign, with the results indicating statistical insignificance in the long run. However, receipts from the hospitality and accommodation were found to only influence poverty alleviation in the short run. Relatedly, the results suggest that increases in consumption associated with growth in tourism arrivals did not influence poverty in the BRICS. The results point to the heterogeneity of the influence of tourism on poverty alleviation, whereby certain dimensions of tourism contribute to poverty alleviation in the long run and others do so in the short run. Based on these findings it is recommended that BRICS countries harness their tourism potential and promote intra-BRICS tourism to maximise the positive impact of travel and tourism export receipts on household consumption, which catalyses poverty alleviation.

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