Determinates of price Earning Ratio

Introduction:
Many researches have focused on analyzing the stock market performance using different financial Ratios for example Price to Sale Ratio, Price to Dividend, Price to earning Ratio, Book to market ratio. When most investors mostly relay on price to earning ratio for analyzing the equity investment and use the equity valuation model for individual stocks, sectors, and markets. P/E ratio is important indicator of the state of stock prices of individual stock level. The P/E ratio means the company current price dividing by the earning par share. The P/E ratio tells how much you are paying the each dollar for company earning. The first think about understand P/E ratio to design a value of share of stock not a company and stocks are priced per share. The P/E ratio tells that what the market willing to pay for current time and what its future earning may be we assume that the earning may be constant in future. When P/E ratio is low than investors expect that no little growth in the companys earning in future. When we are calculated the P/E ratio to see if stock is over and under value. First we compare its current P/E ratio to past P/E ratio. This will tell us how the stock is will cheap and expansive and how its value is past. The second step is P/E ratio compare with the P/E ratio of other company in the same industry. When the companies have same P/E ratio it will be higher or lower than its peers. The low P/E ratio stocks have no good value. The P/E multiple of a company is determined by many factors but the key determinants are (a) Expected Growth Rate (b) Current and Future Risk and (c) Current and Future investment needs. Actual literature have investigated the determinants of P/E ratio by using different intermediary for risk, growth, discount rate and dividend payout usually in developed countries ( white, 2000; Shamsuddin and Hiller, 2004 and Dudney et el., 2008). Pakistani stock market is a surface market, and has remained highly momentary during last decapods. The KSE 100 index touched the highest ever benchmark of 14,814 points on December 26th , 2007, a day before the assassination of former Prime Minister BENAZIR BHUTTO, when the index nosedived. The index recovered quickly in 2008, reaching new higher near 15,500 and the KSE 100 index displayed an increase trend through 2005 to 2007 and arrived at its Hill on 20th April with 15,676 points. The volume of two companies is high when the market touching his highest Point from Chemical sector. The 1st company is ENGRO Chemical or 2nd is Dawood Hercules Chemicals. However by November 22, 2008 during the global financial crisis of 2008 it had fallen to 9,187 and than due to political uncertainty the stock

market prices decrease and the stock market closed at 5865 on 30th December 2008. The descending affection of stock market restated during 2009 and investors remained uncertain to invest in Stock market (Economic Survey 2009). The first study prove the P/E effect was b Nicholson (1960), who complete that the consumer of common stock can logically explore the greater productiveness characterized by stocks with low rather than high price earning ratio. Basu, S. (1975) and (1977) usually confirmed Nich olsons results.