P/E Ratio Analysis: Evaluating Share Values of Select Companies

This report provides an analysis of the price earnings (P/E) ratios of selected companies to determine whether their shares are overvalued or undervalued. The report begins with an introduction to market share and its importance to investors, followed by an explanation of the price earnings ratio and its calculation using trailing and forecasted methods. The research objectives include comparing the P/E ratios of Capilano Honey Limited, China Dairy Corporation Limited, Coca-Cola Amatil Limited, and Collins Foods Limited, and studying the correlation between earnings per share and market price of shares. The research design relies on secondary data, focusing on statistical data to identify share valuation. The report acknowledges limitations such as time constraints and budget, and is structured into chapters covering the background, objectives, research questions, research design, limitations, and a review of relevant literature concerning share value and P/E ratios. Desklib provides this student contributed assignment along with a wide range of past papers and solved assignments.

To compare the shares of selected companies whether shares are
over or under valued.
Abstract
The market share of a company represents their share in market’s total sales over a certain
period of time. In addition to this, the market share of a company could be calculated by
dividing their sales by the total sales of industries over a period of time. It is a metric which
helps in understanding the size of the company as per the market and competitors. There are
various elements through which the market share of a company would increase or decrease.
The investors constantly analyse the market share of a company like they are increasing or
decreasing because it helps them in understanding the growth of a company.
The investors use different tools in order to analyse the market share of a company. A tool
named price earnings ratio is majorly used for analysing the price of their shares such that they
are profitable to them or not (Khan, et al. 2011). In addition to this, the buying behaviour of the
investors is affected by the under-price and over-price of share. In order to know the value of
the share, the current price of the share in the market is divided by the earning of share.
Further, there are other methods also which could be used for calculating the price-earnings
ratio. In the current market, trailing method is used by investors but this method is criticized on
the basis of a fact that investors only focus on the growth of a company. The other method is
forecasted ratio as it helps in the calculation of ratio. The ratios are helpful in analysing the
condition of a company and on the basis of it, the future prediction could be made. The flaw in
this method is that it has higher chances of risk (Hashemijoo, et al. 2012). In this report, we
would be choosing the trailing method for conducting our research.
Chapter One
1.1 Introduction
There are various factors which affect the value of a company in share market. Volatility in
shares further changes the way investors react. Price earnings ratio is a tool which helps the
investors in determining whether the shares they bought are valued properly. Both underpriced
and overpriced shares affects investor’s decision for buying the shares. It is calculated by
dividing price of share in market to earnings of a share. There are two further types of
calculations for price earnings ratio. In trailing method the latest data is used. Trailing method
has been criticized on the fact that investors are only interested in future of the company. Their
decision is not affected by the profits which company has already earned. Other method used
for calculating ratio is termed as forecasted ratio. As the name indicates this ratio provides
more information about the future position of the company. It is based on some predictions by
the company. The disadvantage of this method is that more risk is involved while considering
this ratio. For the purpose of project trailing method will be used.

1.2 Background
It has been analysed from the study of the research project that price-earnings ratios depend
on various elements. In addition to this, the influence of those elements affects the price-
earnings ratios impacting the value of the share. For attaining the knowledge about price-
earnings ratios we have conducted the exhausted literature review, peer-reviewed articles, and
also analysed the latest published researches. After analysing the journals and research project
various aspects has been evaluated (Fisher and Statman, 2000).
For analyses would be done in order to know the price-earnings ratios regarding the share of
company i.e. they are over or undervalued (Avkiran, 2011). We have to analyse the ratio for
four companies which are Capilano Honey Limited, China Dairy Corporation Limited, Coca-Cola
Amatil Limited, and Collins Foods Limited. All the four companies are related to the private
sector and they have a certain area in the market. Capilano Honey Limited conducts their
operation in Australia as well as in other countries also which helps in gaining a huge market
share. China Dairy Corporation Limited conducts their operation in all over Australia and
competes with other dairy companies. Their revenue is highest among their competitors. Coca-
Cola Amatil Limited works with help of their subsidiaries, distributes, and manufactures in order
to sell beverages in Australia and other countries like Indonesia, Fiji, New Zealand, etc. Collins
Foods Limited is a food outlet and restaurant in major parts of Australia and Asia. The
information about the market share of these companies could be collected with help of
different sources (Hjalmarsson, 2010). Analysing their market share from the legitimate sources
would help in evaluating the P/E ratio effectively.
1.2 Objective of Study
 To compare price earnings ratio of selected companies
 To study the correlation between earnings per share and market price of share
1.3 Research Questions
 Which are the various factors affect the value of the company?
 How to examine the share value of the selected companies?
 How to analyze the profit earnings ratio of the selected companies and compare them
with one another?
2

1.5 Research Design
In order to collect the data for the research, various methods and techniques could be used. For
collecting the data for a research two major methods are utilized i.e. qualitative and
quantitative data. These methods would be used during the collection of data and if any
problem occurred during the process it would be handled by them. Our research has been
solely dependent on the statistical data which could be collected through the secondary
research. The major focus of research is to collect data in order to identify that the share of the
company is over-valued or under-valued.
1.6 Limitation and importance of Study
In order to conduct a research, there are various types of problems which occurred during
under it. The first problem of this research is time constraint as more time is needed to conduct
the research and attain the desired result effectively. If the research conducted for a longer
period of time then the proper research and analysis would be conducted which helps in
gaining the desired objective. The next problem during the research is budget as certain
resources would be unavailable due to the issue of budget. This research is based on the
secondary data which is verified by other researchers such that there is a chance of error (Flint,
et al. 2010). Also, this research is an academic research not a paid research such that the
chances of error in the report are nominal.
1.7 Chapterisation
Chapter One – This chapter provides an overview of background, objective, research
question, research design and limitation of studies for
 CAPILANO HONEY LIMITED
 CHINA DAIRY CORPORATION LIMITED
 COCA-COLA AMATIL LIMITED
 COLLINS FOODS LIMITED
.
Chapter Two – This chapter focuses on the dependent and independent variables and also
backups the argument with review of literature with regards to share value of the company.
2.0 INTRODUCTION
There are various factors which affect the value of a company in share market. Volatility in
shares further changes the way investors react. Price earnings ratio is a tool which helps the
3

investors in determining whether the shares they bought are valued properly. Both underpriced
and overpriced shares affects investor’s decision for buying the shares. It is calculated by
dividing price of share in market to earnings of a share. There are two further types of
calculations for price earnings ratio. In trailing method the latest data is used. Trailing method
has been criticized on the fact that investors are only interested in future of the company. Their
decision is not affected by the profits which company has already earned. Other method used
for calculating ratio is termed as forecasted ratio. As the name indicates this ratio provides
more information about the future position of the company. It is based on some predictions by
the company. The disadvantage of this method is that more risk is involved while considering
this ratio. For the purpose of project trailing method will be used.
2.1 OBJECTIVE
 To compare price earnings ratio of selected companies
 To study the correlation between earnings per share and market price of share
2.2 CONCEPTUAL FRAMEWORK
The variables used in this project are earnings per share and market price of share.
Earnings per share are the earnings of individual shareholders according to the book
profits. Earnings per share can be calculated by two methods named as basic and
diluted. Basic earnings per share do not consider the impact of future obligations such
as conversion of preference shares and shares buying option. It is simply calculated by
dividing earnings with number of shareholders. On the other hand diluted earnings
consider the future impact of the equities and debt on number of shares. Thus it can be
said that diluted earnings per share is less risky than basic earnings per share. The other
factor that will be used is market price of share. Market price of share is the price at
which shareholders are ready to buy the shares. It is influenced by various factors such
as profitability, earnings per share and market share of organization etc. The price listed
in stock exchange will be used as market price of share. For the study in part two food
and beverage sector is selected.
Following is the list of the companies which will be studied for the project:-
 CAPILANO HONEY LIMITED
 CHINA DAIRY CORPORATION LIMITED
 COCA-COLA AMATIL LIMITED
 COLLINS FOODS LIMITED
2.3 REVIEW OF LITERATURE
Basu (1977) found out from a survey that stock with low price earnings ratio is more
superior. The reason he provided for this superior return is the risk adjustment. Fuller et
al. (1993) also conducted the study on price earnings ratio and market price and found
that companies which had less price earnings ratio are having more returns than
4

companies with high price earnings ratio. They also asserted that the price of the shares
under the sample is not priced rightly. Dreman (1994) also found the same findings as
above. But he also provided a recommendation to the investors. He stated that if
investors want to utilize the price earnings formula for good returns then they should
hold the shares for a long period. This technique is useful if used in long run. Siegel
(1995) also studied the share price by analyzing the price earnings ratio and stated that
in long term the shares with high P/E ratio performed well. Jitmaneeroj, B. (2017)
studied the relationship among dividend policies and P/E ratio. He found that the
relationship is not visible in short run. However, if stocks are analyzed for a long run
then there is a significant relationship among the variables (Tandon and Malhotra,
2013).
2.4 TABLE FOR REVIEW OF LITERATURE
TOPIC JOURNAL OBJECTIVE VARIABLES OUTCOME
Multivariate causal
estimates of dividend
yields, price earnings
ratio and expected stock
returns: Malaysian
evidence. FaizatulSyuha
da& Wan Mansor.
(2011)
International
Journal of
Financial
Management
To study the
relationship
among the
variables
Price
earnings
ratio,
Return
from stock,
dividend
yield
Stock price can
be predicted
by analyzing
the variables
provided
The value and glamor
stocks performance at
the Indonesia stocks
exchange using the price
earnings ratio
approach. Hasnawati,
(2010)
The International
Business &
Economics
Research Journal
Evaluating
the
portfolios
and testing
performance
of different
type of
stocks
Portfolio
stock and
investment
in one
stock
Portfolio
stocks found in
less risk
category then
glamor stocks
The Analysis of Factors
Affecting Price Earnings
Ratio on the Company
Shares Registered in
Jakarta Islamic
Index. MuslichLutfi&
Jessi Arsitha(2016).
Academic Journal
of Economic
Studies
Analyzing
the factors
by applying
t- test and
simultaneou
s test
Current
and non-
current
assets,
debt and
equity,
dividend
payout
ratio
Except
dividend
payout ratio all
the variable
have effect on
price earnings
ratio
Audit quality and
overvalued
equity. Houmes, Foley
&Cebula(2013).
Accounting
Research Journal
To check the
effect of
audit quality
on equity
Market
price of
shares and
earnings
Significant and
positive
coefficients
found
5

valuation by
applying
price
earnings
ratio
per share
Portfolio strategies using
EVA, earnings ratio or
book-to-market. Leong,
Pagani&Zaima(2009).
Review of
Accounting &
Finance
To find the
method for
earning
more
returns from
EVAM
(earnings
value added
to market
value) and
price
earnings
ratio to book
value
Book value
of equity,
market
value of
equity
EVA method
considered
more reliable
for predicting
the share
prices
Unlocking the sources of
the apparent episodic
stationarity of the P/E
ratio. Karras, Jin-Man
&Neuburger(2007).
Review of
Accounting &
Finance
To check the
reason
behind the
non-change
in price
earnings
ratio
Earnings
per share
and market
price of
share
Results were
tested on
stock prices for
different
periods and
different
variation were
found
An exploration of
earnings whispers
forecasts as predictors of
stock
returns. Abraham(2005).
Journal of
Economic Studies
To check
miller price
optimism
model by
applying
different
type of
proxy
Investment
s in one
proposal
and
portfolio
manageme
nt and
stock
prices
Stock with high
difference
indicated
towards
glamour stock
and other was
linked to value
stocks
Share Price Analyst With
PBV, DER, And EPS At
Initial Public
Offering. KriswantoKrisw
anto. (2016).
Journal the
Winners:
Economics
To analyze
the impact
of over and
underpricing
of share by
linking them
with
variables
PBV, DER
and EPS
Reason for
underpricing
was found and
stated
Earnings quality and P/E
ratio: Evidence from
Management
Science Letters
Checking the
relationship
Gross
profit ratio,
Positive
relationship
6

Tehran Stock
Exchange. Hassan
Ghodrati,
&JaberGhanbari(2014).
of price
earnings
ratio with
various
variables
listed
profit
variability
and
accruals
with GP ratio
and negative
with variability
and no
relationship
with accounts
payables
Price-to-Earnings Ratios
and Option Prices. Chua,
DeLisle, Feng
&Lee(2015).
Journal Of Futures
Markets
To check the
relationship
between
valuation
and option
pricing by
applying
different
models
Price
earnings
ratio, sales
and prices
of stock
Model
developed to
support the
findings
Value matters:
Predictability of stock
index returns. Angelini,
Bormetti,Marmi&Nardini
(2012
To analyze
the
predictabilit
y of share
prices by
applying
price
earnings
ratio
Price
earnings
ratio and
stock price
fluctuation
s
Model can be
used to predict
the nature of
share prices
The reality behind price
earnings ratios
(PERs). Hattingh, C.
(2013).
Accountancy SA To provide
information
regarding
price
earnings
ratio
Price
earnings
ratio
Comprehensiv
e study
provided
various new
ways to utilize
this ratio in
financial
planning
Does investor sentiment
affect price-earnings
ratios? Jitmaneeroj(2017
).
Studies in
Economics and
Finance
To check the
relationship
of investor’s
sentiment
on price
earnings by
applying
latent
variable
model
Price
earnings
ratio and
latent
variable
(Sentiment
s)
Due to
limitation of
latent variable
the findings
were not true
The impact of dividend
policy on price-earnings
ratio. Jitmaneeroj(2017).
Review of
Accounting &
Finance
Using
nonlinear
relationship
Price
earnings
ratio and
Curvature
relationship
found
7

model to
establish the
link between
the variables
dividend
payout
ratio
Value investing with
price-earnings ratio in
India.
Chhaya&Nigam(2015).
IUP Journal of
Applied Finance
To testify
the
performance
of growth
strategies
and value
strategies
Earnings,
dividends
and book
value
Statistical tools
provided
significant
evidences for
the research
Structural properties of
the price-to-earnings
and price-to-book
ratios. Nezlobin,
Rajan&Reichelstein(2016
).
Review of
Accounting Studies
To check the
existence of
relationship
among
variables
Price-to-
earnings
and price-
to-book
ratios.
Factors listed
which affects
both the
variables and
then
relationship
established
Share Prices And
Price/Earnings Ratios As
Predictors Of Fraud Prior
To A Fraud
Announcement.
Weske&Benuto(2015).
Academy of
Accounting and
Financial Studies
Journal
To testify
the
implication
of
announcem
ent on price
earnings
ratio
Share
Prices And
Price/Earni
ngs Ratios
Results stated
that if ratios
are analyzed
carefully then
loss can be
minimized
from frauds
Risk Measure and Early-
Warning System of
China's Stock Market
Based on Price-Earnings
Ratio and Price-to-Book
Ratio. Rongda Chen,
Sheng Ye,
&XianchaoHuang(2014).
To measure
the risk of
share
market by
analyzing
the ratios
Price
earnings
ratio and
stock
prices
Findings stated
that if used
carefully can
risk associated
with market
can be
accessed
properly
Determinants of Price-
Earnings Ratio: The Case
of Chemical Sector of
Pakistan. Samya Tahir,
&TalatAfza(2012).
International
Journal of
Academic
Research in
Business and Social
Sciences
To find the
factors
which
influences
the price
earnings
ratio
Dividend
payout
ratio and
price
earnings
ratio
Importance of
studying
variations
provided
Testing the efficiency of
price-earnings ratio in
constructing portfolio.
Bodhanwala(2014).
IUP Journal of
Applied Finance
To test the
implication
of P/E ratio
in selecting
portfolios
Share
price, price
earnings
ratio
Results
indicated that
if ratios used
with statistical
tools then
8

good returns
were found
Improved alternatives to
price multiple and
earnings growth ratios
used by bottom-up
investors. DeBoeuf, Lee
&Stanley(2013).
Applied Financial
Economics
To measure
the risk of
share
market by
analyzing
the ratios
earnings
growth
ratios
Do residual earnings
price ratios explain
cross-sectional variations
in stock returns?
Dudney, Jirasakuldech,
Zorn&Emekter(2015).
Managerial
Finance
To
determine
the
fundaments
which can
be
determined
and other
which
cannot be
determine
Price
earnings
ratio and
earnings
price ratio
What Is Your Eps? Issues
In Computing And
Interpreting Earnings Per
Share. Jewell
&Mankin(2016).
Academy of
Accounting and
Financial Studies
Journal
To
demonstrate
various ways
in which EPS
can be
calculated
Earnings
per share,
shareholde
rs fund and
number of
shareholde
rs
Problems in
determining
EPS
highlighted
and solutions
provided
The effect of earnings
per share categories on
share price behavior:
Some south African
evidence. Robbetze, de
Villiers &Harmse(2017).
Journal of Applied
Business Research
To link
earnings per
share with
price of
shares in
market
Earnings
per share
and stock
prices
Recommendati
ons provided
to guide both
managers and
investors
Empirical Analysis Of The
Impact Of
Comprehensive Income
On Basic Earnings Per
Share For Spanish
Companies Listed On
Madrid Stock
Exchange. Francisco
Sousa Fernández&María
Mercedes
CarroArana(2011).
International
Business &
Economics
Research Journal
To show the
difference in
calculation
by
comprehensi
ve and net
income
Earnings
per share,
gross and
net income
Comprehensiv
e method is
considered
more efficient
Speculative And Pure
Risks: Their Impact On
Firms' Earnings Per
Journal of
International
Business Research
To show the
impact of
beta values
Earnings
per share,
market
No significant
impact on EPS
found
9

Share. Ferrer, R. C., &
Mallari(2011).
on earnings
per share
share and
beta value
Impact of earnings per
share on market value of
an equity share: An
empirical study in indian
capital market. Bhatt, P.,
Dr, &Sumangala(2012).
Journal of Finance,
Accounting and
Management
To analyze
the changes
in MPS due
to variations
in EPS
Earnings
per share
and market
price of
share
Positive
relationship
found
The persistence of
earnings per share. Gil-
alana&Peláez(2008).
Review of
Quantitative
Finance and
Accounting
To check
how EPS is
persistence
in spite of
changes in
market
EPS and
equity
valuation
This reason is
linked with
business cycles
Improving earnings per
share: An illusory motive
in stock
repurchases. Wei
&Wang(2009).
International
Journal of Business
and Economics
To provide
information
regarding
effect of
repurchase
shares on
stock price
Earnings
per share,
marker
price of
share,
repurchase
plan
The country in
research was
not affected by
stock
repurchase
Earnings per Share:
Stylized Facts and New
Paradigms. Peláez(2007).
Journal Of
Behavioral
Finance,
To link the
variables of
EPS with
changes in
market
EPS, MPS Evidences
were not
consistent with
rationality in
market
"Determinants of equity
share prices in India."
Sharma & Sanjeet
(2011).
Researchers World
2, no. 4 (2011): 51
To examine
the
empirical
relationship
between
equity
Share prices
and
explanatory
variables
such as:
book value
per share,
dividend per
share and
others.
Book value
per share,
dividend
per share,
earning
per share,
price
earnings
ratio,
dividend
yield,
dividend
pay-out,
size in
terms of
sale and
net worth
for the
period
1993-94 to
The results
revealed that
earning per
share,
dividend per
share
and book value
per share has
significant
impact on
The market
price of share.
10

2008-09
Marginal stockholder tax
rates and the clientele
effect. Elton & Gruber,
(2011).
Investments And
Portfolio
Performance (pp.
3-9).
To test a
method of
determining
marginal
stock holder
tax brackets
and explore
its various
implications.
Marginal
stock
holders tax
brackets,
corporate
dividend
policy and
corporate
investment
policy.
This paper
shows that the
direction of ex-
dividend-day
price behavior
is consistent
with a tax
explanation
and that ex-
dividend-day
price behavior
changes, as
theory
suggests
, with changes
in the tax law.
Demographic trends, the
dividend-price ratio, and
the predictability of
long-run stock market
returns. Favero,
Gozluklu, & Tamoni,
(2011).
Journal of
Financial and
Quantitative
Analysis, 46(5),
pp.1493-1520.
It shows the
existence of
a trend in
the log
dividend
price ratio,
determined
by various
variables.
Dividend
Price ratio
The joint
significance of
the
demographic
variable in long
term
forecasting
regressions for
market returns
explains the
ability of the
dividend price
ratio to predict
stock returns.
Stock price forecast
using Bayesian network.
Zuo & Kita, (2012).
Expert Systems
with Applications,
39(8), pp.6729-
6737.
This paper
describes
the price
earnings
ratio (P/E
ratio)
forecast by
using
Bayesian
network.
Past and
present
stock
prices.
The results
prove that the
present
algorithm is
better than the
traditional one
for comparison
of correlation
coefficient and
the root mean
square error.
Determinants of stock
prices: Empirical
International
Journal of
The paper
intends to
Stock
prices,
The results of
revealed
11

evidence from NSE 100
companies.
Tandon & Malhotra,
(2013).
Research in
Management &
Technology
(IJRMT), ISSN,
2249, 9563.
undertake
the objective
of reviewing
the existing
literature by
studying the
empirical
relationship
between
stock prices
and various
internal
factors of
the
company.
dividend
per share,
earning per
share and
dividend
yield
that
company’s
book value,
earnings per
share and
price-earnings
ratio are
having a
significant
positive
association
with firm’s
Stock price.
.
Impact of dividend policy
on stock price risk:
Empirical evidence from
equity market of
Pakistan. Asghar et al,
(2011).
Far East Journal
of Psychology and
Business, 4(1),
pp.45-52.
This study
was
conducted
with the
objective of
finding out
the impact
of dividend
policy on
rising stock
prices.
Dividend
Yield and
Price
Volatility.
The results of
the study
reveals that
the correlation
of price
volatility and
dividend yield
is very
important
when compare
to other
variables.
Macroeconomic factors
and stock returns:
Evidence from Taiwan.
Singh, Mehta &Varsha,
(2011).
Journal of
economics and
international
finance, 3(4),
p.217.
b
This study
attempts to
examine the
casual
relationship
between
index
returns and
certain
important
macroecono
mic variable
namely
employment
rate,
exchange
rate, GDP,
Inflation and
GDP,
inflation,
Employme
nt rate,
Exchange
rate.
The results
revealed that
exchange rate
and GDP
affects the
returns of all
portfolios,
while inflation
rate, exchange
rate, and
money supply
were having
negative
relationship
with returns
for portfolios
of big and
medium
12