The Return-Stages Valuation Model and the Expectations Within a Firm's P/B and P/E Ratios

Morris Danielson and Thomas Dowdell

Financial Management, 2001, vol. 30, issue 2

Abstract: The return-stages model can quantify the expectations facing a firm from its price-to-book (P/B) and price-to-earnings (P/E) ratios. We illustrate two implications of the model. First, a firm’s P/B and P/E ratios can predict the future cash flow pattern earned by a firm. Second, the operating performance consistent with a given stock return differs across four groups of firms: Growth Firms, Mature Firms, Turnaround Firms, and Declining Firms. Our results imply that a firm’s stock return depends, in part, on how its operating performance compares to the expectations defined by its P/B and P/E ratios.

Date: 2001
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