The application of P/E ratio for selection of stocks of small companies listed on NewConnect market
The application of P/E ratio for selection of stocks of small companies listed on NewConnect market

Summary/Abstract: Purpose – The aim of the article is to verify whether the Price/Earnings (P/E) ratio is helpful for selection of stock of small companies listed on NewConnect with higher rates of return. Design/Methodology/approach – The article embraces an empirical research – the quantitative analysis that has been based on the several hundred stocks quotations data from NewConnect in years 2007–2015. Stock market quotations derive from the websites devoted to stock exchange: gpw.pl, newconnect.pl, gpwinfostrefa.pl and stooq.pl. Values of P/E ratio and rates of return of stocks in consecutive years have been used from NewConnect Statistic Bulletin from 2007–2015 placed on the NewConnect website. The scope of research embraces small companies on NewConnect which had positive values of P/E ratio. Consequently, in each year the number of companies taken into account fluctuated. The research hypothesis has been put forward: in years 2007–2015 stocks of small companies listed on NewConnect with the lowest values of P/E ratio offered higher rates of return than companies with the highest values of P/E. In both cases there are only above-zero (positive) values of P/E considered. Findings – The main finding of the article is that P/E can be a useful tool to select potentially more profitable stocks. It occurred that stocks with the lowest P/E values generally offered higher rates of return in the next calendar year than stocks with the highest P/E values. The analysis confirmed that the P/E ratio can be a useful method to choose stocks with brighter prospects than average stocks. It appeared that companies quoted on NewConnect with statistically lower P/E values are relatively better investments. In the period given, companies from the first and the second group (lowest P/E ratios) had on average higher rates of return than enterprises with higher P/E values. It seems that stocks perceived at the end of the year by investors as 'cheaper' grew in the next year faster than stocks known as being 'quite expensive' or 'expensive' (high P/E values). Originality/value – the article covers the quantitative research worked out by the author. It concerns the usefullness of P/E ratio for taking investment decisions on the stock market for small companies – NewConnect. Previous studies about P/E ratio and its applications focused mainly on the main market of the Warsaw Stock Exchange. Therefore, the empirical research in the article contributes to the methods of assessment of investment attractiveness of small companies' stocks. It is important to emphasize that data is based on the quotations from 9 years, so the whole period of NewConnect functioning (since its foundation) is embraced.

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