Impact of economic value added (EVA) momentum on change in price-earnings ratio of selected publicly listed companies in the Philippines

• Main Authors: Angsico, Nikko Miguel A., Chan, Linnet Madelane C., Patungan, Paula Bianca F., Tan, John Louise T.
• Format: text
• Language: English
• Published: Animo Repository 2011
• Subjects: Economic value added; Price-earnings ratio > Philippines; Stocks > Prices > Philippines; Corporate profits; Corporations > Valuation
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/14707
• Institution: De La Salle University

The perceptions gap that exists between shareholders and managers of a company has led investors to use financial statements as their primary basis for their investment decisions. One of the most popular accounting ratios, price-earnings ratio, has always been used by many investors as a red flag for overvalued or undervalued stocks. However, as seen in recent accounting scandals, such as that of Enron and WorldCom, overreliance on fundamental accounting ratios could divert the attention of investors from vital information that are red signals of impending bankruptcies of these companies. On one hand, Stern has developed a value based metric, Economic Value Added Momentum, which has a similar purpose with price-earnings ratio. Conversely, what is new with this ratio is that it takes into account the capital charge for companies which fundamental accounting ratios fail to consider. With this said, we have determined through tests of correlation and panel regression that EVA Momentum and price-earnings ratio are not correlated and that EVA Momentum is not embedded in and does not have an impact on a company’s price-earnings ratio. However, this study does not conclude that price-earnings ratio is not a reliable tool for investors in their decision-making but rather price-earnings ratio does not take into account the value-adding capability of a company – a feature measured by the EVA Momentum. In addition, we have also inferred from the results of this study that most companies fail to disclose vital information that investors can use in measuring the value-adding capability of their investments. Lastly, this study has concluded that the relatively better performing industries listed in the Philippine Stock Exchange in terms of their EVA Momentum in relation to their price-earnings ratio are those in the financial, holding firms, and oil & mining sectors. This study, however, does not conclude that these industries perform relatively better in all key performance areas.