Recently, a friend came to roast that the PE method commonly used in the market failed directly, and then Barabara said a lot. Although the price to earnings ratio may be tricky, it is still useful. Did you use it incorrectly? Today, let's briefly talk about how to use the PE method.

Firstly, choose the appropriate industry.

Generally speaking, the price to earnings ratio is more suitable for industries with stable operations, such as fast-moving consumer goods. Investing with a price to earnings ratio is particularly unsuitable for industries where profits can fluctuate, such as cyclical stocks.

In stock trading, the most frustrating thing is to buy a cyclical stock with 20 times PE, such as coal. Although it may seem undervalued now, coal prices will drop significantly due to various reasons, and PE may directly increase from 20 times to 200 times, causing the stock price to plummet again and again.

Secondly, the importance of expected changes (upward or downward, how much) is much greater than the current situation.

For example, after the state issued a certain regulation, the share prices of Baijiu shares such as Moutai fell in response to the demand, which was a direct response to this expectation. At that time, Moutai PE was not expensive. Due to the restriction on consumption, the performance is likely to decline, and subsequently PE is likely to rise, resulting in the current stock price being expensive.

Thirdly, this is an important factor in industry comparison.

For example, everyone is engaged in testing, and their technical and marketing levels are similar. If the industry average valuation is 40 times, and the stock you are looking at is directly valued at 200 times, it is highly likely that they are overvalued.

But overall, the price to earnings ratio is only a reference, and it is not very reliable. After all, it is difficult to verify the authenticity of financial statements of A-share listed companies.

If you make big purchases, just take a look. If you are a growth stock, it is more recommended that you pay attention to the trend of changes in your main business revenue, rather than the P/E ratio corresponding to profits. Otherwise, you will miss a vote of Internet bull shares such as JD.