p/e ratio

Price to earnings ratio, also known as the "price to earnings ratio", is the ratio of the market price per share of a stock to its after tax profit per share. It reflects the time required for stock investors to recover the cost of a stock through dividends after purchasing it at a certain cost price.

For example, if an investor buys Company A's stock at a price of 20 yuan per share, and Company A's stock earns 0.5 yuan per share annually, then the P/E ratio of Company A's stock is 20/0.5=40 (times).

Several important concepts of price to earnings ratio

1. Standard P/E ratio

In addition to being used as an indicator to measure the level of stock prices in the secondary market, the price to earnings ratio is also often used as an important indicator to estimate the issue price during stock issuance. Based on the earnings per share of the issuing company and market factors, determine a reasonable issuance price to earnings ratio multiple, and multiply the two to obtain the issuance price of the stock. When establishing a price to earnings ratio multiple, a 'standard price to earnings ratio' is introduced for comparison.

Standard P/E ratio, which is the P/E ratio calculated based on bank interest rates. For example, the current one-year fixed deposit interest rate in China is 2.25%, which means that investing 100 yuan yields a one-year return of 2.25 yuan. According to the P/E ratio formula, 1002.25=44.44 (times). If buying stocks is purely for the purpose of obtaining dividends, and the company's performance remains unchanged, then if the P/E ratio of a certain stock is higher than 44.44, it is more cost-effective for investors to deposit money in the bank, and the time to recover costs is even shorter.

Therefore, when the P/E ratio of stocks is lower than the standard P/E ratio converted from bank interest rates, funds will be used to purchase stocks. Conversely, when the P/E ratio is lower, funds will flow into bank deposits, which is also the simplest and most intuitive P/E ratio pricing analysis.

2. Static P/E ratio

Static P/E ratio is a widely discussed P/E ratio in the market, calculated as: P/E ratio=closing price per share/after tax profit per share of the previous year. For example, if Company A's stock price is 20 yuan/share and its after tax profit per share was 0.38 yuan/share last year, then its P/E ratio is 200.38=52 times. This is a static P/E ratio algorithm that assumes that a company's earnings per share remain unchanged. The earnings per share data used is still from the previous year, but the past cannot represent the future. Investing in stocks is more important for the future. Static P/E ratios can easily mislead investors.

3. Dynamic P/E ratio

The calculation formula for dynamic P/E ratio is based on the static P/E ratio and multiplied by the dynamic coefficient. The coefficient is 1 (1 i) n, where i is the growth rate of the company's earnings per share and n is the duration of the company's sustainable development. For example, if Company A can maintain this growth rate for 5 years in the future, i.e. n=5, then the dynamic coefficient is 1 (135%) and 5=22%. The price to earnings ratio becomes 11.6 times (5222%), which is the dynamic price to earnings ratio. The difference between the two tells us a truth, that is, investing in the stock market must choose companies with sustainable growth. Therefore, it is not difficult to understand why asset restructuring has become an eternal theme in the market, and why some companies with poor performance have become dark horses in the market under the support of substantial restructuring themes.

Correctly view the price to earnings ratio

1. Price to earnings ratio comes from dividends and trading gains and losses

In the stock market, when people fully use the price to earnings ratio indicator to measure stock prices, they will find that the market becomes irrational. For example, the price to earnings ratios of stocks vary greatly and are not aligned with bank interest rates. This is because the returns from stock investment, in addition to dividend income, also include gains and losses generated by bid ask spreads. Stock pricing will be appropriately higher than bank deposit standards, which also reflects the principle that risk and return are proportional.

2. When comparing price to earnings ratios, more consideration should be given to the growth of stock returns

Generally speaking, stocks with higher P/E ratios tend to perform better in the market. This is because the market usually views the price to earnings ratio with a dynamic perspective. A certain company has a broad market prospect and high growth potential. Even if the current P/E ratio remains high, with an annual profit growth rate of 80%, the P/E ratio will soon decrease significantly. On the contrary, some listed companies in sunset industries, even if their P/E ratio is as low as around 20 times, have poor operating conditions and declining profits, and their P/E ratio will soon become extremely high.

Therefore, the price to earnings ratio can only serve as a decision-making factor for investment to a certain extent and cannot be used solely as a basis. In practical investment, it is more comprehensive to consider it in conjunction with the growth rate of stocks. Only stocks with low P/E ratios and good growth potential are the best choices. The high P/E ratio, in addition to the foam attribute, may also reflect investors' recognition of the company's growth potential to some extent. Of course, this does not mean that the higher the P/E ratio of a stock, the better. China's stock market is still in its early stages, and market makers are recklessly pushing up stock prices, resulting in extremely high P/E ratios and huge market risks. Investors should analyze the company's background, basic qualities, and other aspects to make reasonable judgments on the P/E ratio level.

Reasons for high stock market profitability

Generally speaking, if a stock has a high P/E ratio, it may be due to the following reasons:

1. The market predicts that the future profit growth rate will be fast.

2. The company has always been profitable, but there was a special expense in the previous year that reduced its profits.

3. When a foam appeared, the stock was sought after.

4. This enterprise has a special advantage that ensures sustained profitability in low-risk situations.

5. There are limited stocks to choose from in the market, and under the law of supply and demand, stock prices will rise. This makes the comparison of price to earnings ratios across time less meaningful.

Several principles of the "price to earnings ratio" stock selection method

1. Dynamic P/E ratio is more effective than static P/E ratio

Generally speaking, the price to earnings ratio calculated based on the previous year's performance is the static price to earnings ratio, while the price to earnings ratio calculated based on the current year's performance growth rate is the dynamic price to earnings ratio. The commonly used stock software only displays static P/E ratios, while dynamic P/E ratios often require investors to calculate based on several published quarterly reports. For everyone, it is not only important to consider the static P/E ratio, but also the dynamic P/E ratio. Otherwise, the conclusion drawn is incorrect, especially for companies with significant performance growth. If you look at the static P/E ratio again, it is definitely very high, but in reality, this clearly does not mean that the company's stock price is overvalued.

2. Price to earnings ratio cannot be simply compared horizontally

Price to earnings ratios cannot be simply compared horizontally across different sectors. Even for different stocks within the same sector, their valuations may vary depending on factors such as the company's share capital size and growth potential. For example, during the process of a bear turning bull, many people believed that 5-fold bank stocks were more worth investing in, but when 30 times the value of medical stocks rose to 100 times, bank stocks only rose to 10 times. When a bull turns bear, many people believe that brokerage stocks at 30 times are safer than those on the ChiNext board at 100 times, but in reality, brokerage stocks are more likely to fall.

3. Price to earnings ratio is more suitable for vertical comparison

The vertical comparison referred to here refers to the price to earnings ratio level of the same sector at different time points. For example, in the past decade, for most white horses, the price to earnings ratio of pharmaceutical stocks has been roughly between 20-50 times. So, when comparing vertically, the closer the sector valuation is to 20 times, the safer it is obviously, while the closer it is to or even higher than 50 times, the greater the risk.

4. Multiple factors affecting a company's price to earnings ratio

The factors that affect the average P/E ratio of a company or sector mainly include the following aspects: the characteristics of the industry in which the stock is located, and the Chaoyang industry obviously has a higher P/E ratio. The growth potential of a company, and the higher the P/E ratio of a company with faster performance growth. The larger the company size and the smaller the share capital, the higher the P/E ratio of the company. The impact of the company's cyclical characteristics. The impact of interest rate levels. The impact of market environment.