Discuss the factors that might explain the differences in the price earnings rat

Question

Discuss the factors that might explain the differences in the price earnings ratios of the three companies below and the changes that have occurred in their price earnings ratios over the period. (The companies have been chosen with a range of P/E ratios, to give with a relatively low value, one with a relatively high value, and another with a middling value. Although not necessary, firms from the same industry helps for comparison reasons) You should use the insights provided by valuation models on the determinants of the price earnings ratios in your discussion, but you should also discuss the role of any other factors that might influence the reported values of price-earnings ratios of the companies you have chosen.

5.4 7.1 Name EPS 2008 2009 2010 2011 2012 2013 2014 2015 BT GROUP PRICE P/E RATIO EPS 0.24 2.73 11.3 0.25 1.35 0.19 1.35 0.2 1.81 9.1 0.22 1.91 8.6 0.25 2.31 0.27 3.79 14.1 0.3 4.02 13.5 BURBERRY GROUP PRICE P/E RATIO EPS 0.32 5.69 17.9 0.33 2.22 6.7 0.28 5.99 21 0.43 11.24 26.1 0.56 11.85 21.3 0.53 12.26 23 0.71 15.16 21.4 0.74 16.36 RANDGOLD RESOURCES PRICE P/E RATIO 0.28 18.47 67.2 0.42 29.48 74.2 0.37 50 136.9 0.8 52.75 66.8 2.03 65.85 32.8|| 59.5 20.8 37.9 18.1 1.85 43.8 0,2 1.81 9.4 2.85 2.09 22.2 23.7||

Explanation / Answer

First of all for better understanding let’s know the process & formula of P/E ratio;

Formula of P/E ratio is as follow;

P/E ratio = Market price of the share / EPS

This ratio measures relationship between current market price of the share and EPS, so this ratio is very crucial for the prospective investors and for the company as well because it helps in knowing real value which investors will be willing to pay for the share of the company.

On the basis of the information of the question it is clear that P/E ratio of all three companies are not same and P/E ratio of a particular company also fluctating during 2008 to 2015. So there may be several factors for such different P/E ratio;

1. If EPS of a company is different during the years then P/E ratio will not be same because EPS is denominator of the formula. Suppose market price of share is same and EPS is higher then P/E ratios will be low and in opposite case P/E ratio will be higher.

2. As we are aware that market price of the share is also a part of formula (Numerator) thus change in market price of share will also affect P/E ratio. Suppose EPS remains same during a period of time but Market price of share increases then P/E ratio will also increase and in opposite case P/E ratio will decrease.

Thus on the basis of above clarification it is clear that P/E ratio is not same for all three companies during 2008 to 2015 due to difference in market price and EPS of the companies during this time period.

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