Performance of Low Price-Earnings Companies

Abstract

Practitioners on the stock exchange have claimed that low price earnings (P/E) ratio stocks are generally bargains and do better than the stocks with high P/E ratios. This effect is usually known as the P/E ratio anomaly. The purpose of this study has been to test empirically whether the investment performance of listed companies on the Stock Exchange of Mauritius (SEM) is related to the P/E ratios. An analysis of such a study can help fund managers and academics to contribute to the discussion of the existence of the P/E ratio anomaly in Mauritius and the market form efficiency in the SEM. Results from a portfolio study showed that, between January 2001 and December 2003, below median P/E ratio portfolios earned, on average, higher absolute and risk-adjusted rates of return rather than above median P/E ratio portfolios. These results showed that investing on low P/E companies on the SEM was rewarding and could be used by investment professionals.