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- Title
The Articulation of Price-Earnings Ratios and Market-to-Book Ratios and the Evaluation of Growth.
- Authors
Penman, Stephen H.
- Abstract
The article presents information on the price-earnings ratio (P/E) and the market-to-book ratio (P/B), and describes the role of book rate-of-return on equity in the determination of the ratios and the relation between them. The P/E ratio indicates future growth in earnings, which is positively related to expected future return on equity and negatively related to current return on equity. The P/B ratio reflects only expected future return on equity. So the two are reconciled by a comparison of current and expected future return on equity. The description of the P/E ratio reconciles the standard growth interpretation of the P/E with the transitory earnings interpretation. Both are correct only in special cases. The P/E description contrasts with that of the classical Gordon growth model.
- Subjects
PRICE-earnings ratio; ACCOUNTING; BOOK value; STOCK prices; CORPORATE profits; FINANCIAL performance
- Publication
Journal of Accounting Research (Wiley-Blackwell), 1996, Vol 34, Issue 2, p235
- ISSN
0021-8456
- Publication type
Article
- DOI
10.2307/2491501