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# On Price Earning Ratio – Most Widely Used Tools for Stock Selection

## On Price Earning Ratio

On Price Earning Ratio. Price earning ratio is the more widely used method of estimating stock price. PE ratio / Price Earning Ratio is one of the most widely used tools for stock selection. It is calculated by dividing the current market price of the stock by its earning per share (EPS). A stock is said to be worth some multiple of its future earnings indicating that an investor determines price of a stock by deciding how much he is willing to pay for each unit of estimated earnings.

However, the price earning ratio has been determined by dividend payout ratio, required rate of return, growth rate of dividend, stock dividend, and other variables which has been explained by the following regression model:

 P/E ratioij = a+b1ageij +b2dpratioij +b3 assetij + b4 stdivij + b5 rightij + b6 sprsij + b7 ndij

### Analysis of the Variables

Stock price behavior of the companies and its relation with dividends, stock dividends, right, retained earnings, earnings price ratio approach, earnings per share (EPS), dividend payout ratio, firm size, sponsor shareholding, age of the company, are analyzed in this section of the study. Dividend payout (D/P) ratio is related with earnings.

General observation in the securities market indicates the notion that earnings are important determinant of stock prices. Stock return is the outcome of price changes and dividend thereon. Changes in stock prices experience changes in EPS over the same time period indicating that a large increase in stock price over the time period experience large increase in EPS and the stock suffering large decline in price tends to have experienced large decreases in EPS.

Price earning ratio is the more widely used method of estimating stock price. A stock is said to be worth some multiple of its future earnings indicating that an investor determines price of a stock by deciding how much he is willing to pay for each unit of estimated earnings.

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