Marcin Narloch marcinnarloch.me

Finance

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How each of the following fundamental factors could affect company’s P/E?

By Marcin Narloch, 24 March 2012

Fundamental Factor Effect on P/E Explanation
The risk (beta) increases Decrease P/E is decreasing function of risk, so that as risk increases, P/E will decrease.
The estimated growth rate increases Increase P/E is increasing function of the growth rate, so if the company is expected to grow, the P/E will grow accordingly.
The equity risk premium increases Decrease P/E is decreasing function of equity risk premium, so that once the risk is rising, P/E will drop.

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