A Critical Assessment of the Relationship between P/E Ratio, RONW and ROCE: A study of FMCG, IT and Banking Sectors

Jump To References Section


  • Assistant Professor, Finance, Ramaiah Institute of Management, Bengaluru – 560054, Karnataka ,IN
  • Assistant Professor, Analytics, Ramaiah Institute of Management, Bengaluru - 560054, Karnataka ,IN




Macroeconomic Variables, Overvalued Stock, Price-to-Earnings Ratio, Return on Capital Employed, Return on Net Worth, Stock Prices, Undervalued Stock


Stock investing requires careful analysis of financial data to find out the company’s true worth. Valuation ratios and Return ratios can predict the share price performance, giving investors an opportunity to know if a stock is overvalued or undervalued. Data for the period from 2010 to 2020 is considered for the study. Price- Earnings ratio (P/E ratio), Return on Net Worth (RONW) and Return on Capital Employed (ROCE) for the top five companies in the FMCG, Banking, and IT sectors are taken for the study. The relationship between the identified variables has been analysed using correlation and linear regression techniques. The analysis reflects that there is a positive relationship between the P/E Ratio with RONW and ROCE for most of the companies in all three sectors. While many factors influence the investment decision, the P/E ratio is an important metric to consider. For the companies across the various sectors, it is evident that the ROCE and RONW have a very strong correlation and also exert influence on the P/E ratio. Therefore, a simple linear regression model is used to demonstrate the relationship between the P/E ratio and ROCE and P/E ratio and RONW. For all the companies across the sectors, a positive relationship is reflected between the P/E ratio and RONW and ROCE. It is essential to analyze the ratios together to get a comprehensive understanding of the financial performance of companies.


Download data is not yet available.


Metrics Loading ...




How to Cite

Jeevitha, R., & Rema, V. (2022). A Critical Assessment of the Relationship between P/E Ratio, RONW and ROCE: A study of FMCG, IT and Banking Sectors. SDMIMD Journal of Management, 13(2), 1–16. https://doi.org/10.18311/sdmimd/2022/30077



Research Papers



Aras, G., and Yilmaz, M. K. (2008). Price-earnings ratio, dividend yield, and market-to-book ratio to predict the return on the stock market: evidence from the emerging markets. Journal of Global Business and Technology. 4(1). https://mkyilmaz.com/wp-content/ uploads/2014/11/price-earnings-ratio.pdf.

Calamar, A. (2016). Return on equity: A compelling case for investors. Jensen Investment Management.1-15. https://www.famag.com/userfiles/stories/whitepapers/2016/June/1460992868WP23v4.pdf.

Dayag, A. J., and Trinidad, F. (2019). Price-Earnings Multiple as an Investment Assessment Tool in Analyzing Stock Market Performance of Selected Universal Banks in the Philippines. International Journal of Research in Business and Social Science. 8(4):17–33. https://doi.org/10.20525/ijrbs.v8i4.290

Liem, P. F., and Basana, S. R. (2012). Price Earnings Ratio and Stock Return Analysis (Evidence from Liquidity 45 Stocks Listed in Indonesia Stock Exchange). Jurnal Manajemen dan Kewirausahaan. 14(1):7–12. https://jurnalmanajemen.petra.ac.id/index.php/man/article/view/18368. https://doi.org/10.9744/jmk.14.1.7-12.

Maniar, B. (2014). Factors Influencing Pricing Multiples in India. IUP Journal of Applied Finance. 20(1):23. http://hdl.handle.net/11295/74737.

Ogello, C. A. (2014). The relationship between price-earnings ratio and stock returns of companies listed at the Nairobi Securities Exchange (Doctoral dissertation, University of Nairobi). http://erepository.uonbi.ac.ke/handle/11295/74737.

Pandey, N., Mansuri, Babu, Pandey, Meenu and Vasantharajan, S. (2019). A Study on Capital Structure and Profitability: Evidence from Textile Industry in India. International Journal of Interdisciplinary Research and Innovations. 7(1):468–78.

Shrimal and Kapil. (2015). An empirical study on relationship between selected financial measures and market value added of infrastructural companies in India. Pacific Business Review International. 8:19–23.

Shamsun, A, Tahura and Pervi. (2016). Financial Ratio Analysis and the Impact of Earning Potential ratios of a company on the market price of a stock. IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Ver. IV. 18 (2):25–33. doi: 10.9790/487X-18242533.

Pattabiraman and Shyam (2013). Growth versus Profitability: The Importance of Return on Capital Employed,CFO Connect 31. https://www.pwc.in/assets/pdfs/finance-effectiveness/growth-vs-profitability-theimportance-of-roce.pdf.

Valentin, C. (2015). Determinants of corporate financial performance. http://www.dafi.ase.ro/revista/6/costea%20valentin.pdf.