Testing whether the price-earnings ratio is an Indicator of investment performance of ordinary Shares on the Nairobi stock exchange

Abstract

Investors constantly evaluate performance of different firms and their aim is to determine which firms are doing better so that they can invest their funds in them and which ones are deteriorating in performance so that they can withdraw their investment from them. One of the basic techniques used by investors and the financial analysts is the PIE ratio. This study sought to determine whether the PIE ratios of companies quoted on the Nairobi stock exchange have any relationship with some three basic investment performance indicators namely the Earnings growth, Dividend payout and Earnings growth variations. Using a sample of 30 firms out of the total 55 firms listed at the Nairobi Stock Exchange over the 1993 to 1998 period the researcher examined the relationship between a company's PIE ratio and the indicators mentioned above. The multiple regression technique was ·used for the analysis of data collected and the results showed that a relationship exists between the PIE and the three indicators. The conclusion was that investors can improve their investment portfolio performance if they use the PIE Ratios as the earnings growth is positively related to PIE. The other two factors, that is Dividends payout and Earnings variations had unclear relationships with PIE and this also needs to be taken into account by investors and analysts.