The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits)

by Aswath Damodaran

The key determinants of the PE ratio are the expected growth rate in earnings per share, the cost of equity, and the payout ratio. Other things remaining equal, we would expect higher growth, lower risk, and higher payout ratio firms to trade at higher multiples of earnings than firms without these characteristics. Dividing both sides by the book value of equity, we can estimate the price/book value ratio for a stable growth firm. where ROE is the return on equity (net income/book value of equity) and is the only variable in addition to the three that determine PE ratios (growth rate, cost of equity, and payout) that affects price-to-book equity.