The price/book relation in Maltese listed companies : an analysis

Abstract

The main objective of this dissertation is to analyse the relation between the share prices of the companies listed on the Malta Stock Exchange and their respective book values. The study made use of the Price/Book (P/B) Ratio to identify the extent to which the locally listed companies were over- or undervalued in terms of their book values in the ten-year period between 1992 and 2002. The analysis was based on a weighted PIB Index that was specifically constructed for the purposes of the study. The shape of this P/B Index was very similar to that of the MSE Price Index with the indexes peaking and falling at the same time. The same occurred in the case of the P/E Index, which was also specifically constructed. These movements showed that the changes in share prices were not accompanied by similar changes in profits and book values. Hence, the P/B and P/E Indexes fluctuated according to the price movements and not because of higher book values and profitability. The P /B Index was used in two ways in the study: • To compare each company's PIB relation relative to that of the market; • To compute a theoretical price in order to show what a company's market price should read if, given its book value, it were to have the same P/B relation as the whole market. An analysis of the results demonstrated how the P/B ratios of some of the listed companies were significant in determining the movements of the P/B Index. It was observed that the ratios of these companies were higher than the market averuge. Other companies maintained relatively constant P/B ratios throughout the period analysed showing that the market prices reflected the book values stated in the financial statements. It was also noted that at the end of the period being analysed, the market prices of most of the quoted companies were in close proximity to the book values, showing that the companies were adequately valued in terms of their book values.