Price earnings ratio and share performance at Nairobi stock exchange

Abstract

The study set out to investigate whether there is any significant difference in returns between Low P/E Ratio stocks and High P/E Ratio stocks for companies quoted at the Nairobi stock exchange. The need for the study emanated from the apparent conflict between the contrarian community and the value line where the former argues that the Low P/E stocks consistently produce returns greater than the average stocks and the later quite the contrary, that the higher the P/E Ratio the better, hence the need for an empirical study to get the real picture from our local stocks exchange perspective. (NSE) The P/E Ratios of the companies were computed and the stocks divided into three groups, the High, medium and Low. Share returns and risk were computed using secondary data obtained from the companies financial statements available at the Nairobi stock exchange for the high and low groups only. We then used the one way ANOVA to test our hypothesis. The findings were that there is no statistically significant difference in returns of shares with Low P/E Ratio and the High P/E Ratio. This led to the conclusion that these investment strategies do not apply in this market and hence the investors should use other investment strategies in choosing assets to include in their portfolio.