Support for P/E Ratio of a Company

Dividend payout ratio: If a company has a higher dividend payout ratio than the industry average, it supports a higher P/E ratio for the company.
Growth rate: If a company has a higher growth rate than the industry average, it supports a higher P/E ratio for the company.
Required rate of return: A lower required rate of return supports a higher P/E ratio for the company.

We have seen that the P/E ratio is a commonly used price multiple for valuing a company.

However, an analyst needs to analyze the P/E ratio in the larger context of the other financials of the company and need to be able to determine whether its P/E ratio is supported by the other factors.

In terms of fundamental valuation, the P/E ratio can be written as:

$P/E \text{ ratio}=\frac{\frac{D_{1}}{E}}{k-g}$

Support for P/E Ratio of a Company

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