Syndicate
The PER is affected by the following factors:
The growth expectations carry out a very important role when it comes time to justify the stock market prices – the PER – when the interest rates and risk premium are low. In general high PER belong to a company or shares with high growth expectations.
The stock market prices – the PER – are very sensible to falls in the growth expectations when the interest rates are low.
The three variables – rates, risk premium and growth – are related amongst each other, and this makes it more difficult to apply the face model to do stock exchange previsions.
A good part of the PER paid in stock is justified by the future growth expectations of the owners benefits.
In the last twelve years the stock that have paid more for growth have been Japan and the United States.
There is a statistic relation between the PER the investors pay and the future economic growth.
The PER of a share depends on the profit demanded by the investors and of a factor of value creation which makes the PER increase or decrease.
In order for the company to create value and for the PER to increase it is necessary the ROE be greater than the profit demanded by the shareholders. If it is less, the company destroys value and the PER diminishes. If the ROE = K, the company does not create or destroy value and the PER is the same as 1/K.
Growth will make the PER increase if the ROE > K. If ROE < K, the more it grows the more the PER diminishes.
The ratio of value creation (q = MV/CV) indicates if the company is worth more than what we put into it; or in other words, if the market value if above the countable value. In order for there to be value creation, this ratio must be higher than one.
For the company to create value and the ratio q be higher than one, it is necessary the ROE be higher than the profit demanded by the shareholders. If it is less, the company destroys value and the ratio (q) is less than one. If the ROE = K, the company does not destroy or create value and q = 1.
Growth will make the ratio (q) increase only if the ROE > K. if ROE < K, the more it grows the least the ratio (q) will be.