adjusting pe ratios by growth adjusting pe and risk ….pdf

Adjusting P/E ratios by growthand risk: the PERG ratio Javier Estrada IESE Business School, Barcelona, Spain Abstract Purpose – The purpose of this study is pare the performance of a low-P/E strategy relative to that of two alternative value strategies, one based on the PEG ratio and another on the PERG ratio (a magnitude introduced in this article). Design/methodology/approach – The data used consists of a sample of 100 panies between January 1975 and September 2002. Portfolios are formed on the basis of different valuation ratios, and their performance pared in order to determine the best-performing strategy. Findings – Portfolios sorted by PERG ratios outperform, on a risk-adjusted basis, those sorted by both P/E ratios and PEG ratios. This outperformance occurs regardless of whether portfolios are not rebalanced, rebalanced every ten years, or rebalanced every ?ve years. Research limitations/implications – The sample of stocks is not large. The results could be validated by using a larger sample of US stocks and a longer time period, as well as by using a sample of stocks from several international markets. Practical implications – The PERG ratio proposed in this article improves on the PEG ratio, adjusting the latter by risk. That, plus the fact that PERG-based strategies outperform on a risk-adjusted basis strategies based on both P/Es and PEGs, should make it an attractive tool to add to the arsenal of valuation tools used by analysts. Originality/value – Anew valuation tool is proposed, called the PERG ratio, that adjusts P/E ratios by both growth and risk (or, similarly, PEG ratios by risk). Keywords Price earning ratio, Business development, Strategic objectives, Numerical analysis Paper type Research paper 1. IntroductionThe so-called bubble became, in a way, the short-lived revenge of growth-oriented investors. For many years, practitioners and academics produced a vast number of studies showing the superiority of value strategies over growth strategies