Let's talk about price-earnings ratio

Price-earnings ratio refers to the ratio of stock price to earnings per share during an investigation period (usually 1.2 months). Investors usually use this ratio to estimate the investment value of a stock, or use this indicator to compare the stocks of different companies. P/E ratio is usually used as an indicator to compare whether stocks with different prices are overvalued or undervalued. However, it is not always accurate to measure the texture of a company's stock with P/E ratio. It is generally believed that if the price-earnings ratio of a company's stock is too high, then the price of the stock is frothy and its value is overvalued. However, when a company grows rapidly and its future performance growth is very promising, the current high P/E ratio of stocks may just accurately measure the value of the company. It should be noted that when comparing the investment value of different stocks with P/E ratio, these stocks must belong to the same industry, because the earnings per share of the company are close at this time, and the comparison is effective.

calculation method

the calculation method of earnings per share is the net income of the enterprise in the past 12 months divided by the total number of shares issued and sold. The lower the P/E ratio, it means that investors can buy stocks at a lower price to get a return.

suppose the market price of a stock is 24 yuan and the earnings per share in the past 12 months is 3 yuan, then the P/E ratio is 24/3=8. The stock is regarded as having a P/E ratio of 8 times, that is, every time 8 yuan pays, 1 yuan can share the profits.

investors calculate the price-earnings ratio, which is mainly used to compare the values of different stocks. Theoretically, the lower the P/E ratio of a stock, the more worthwhile it is to invest. It is not reliable to compare the P/E ratios of different industries, different countries and different time periods. Comparing the P/E ratios of similar stocks is of practical value.

the factors that determine the stock price

the stock price depends on the market demand, that is, it depends on the expectations of investors in disguise:

(1) the recent performance and future development prospects of the enterprise

(2) the newly launched products or services

(3) the prospects of the industry

Other factors that affect the stock price include market atmosphere and the upsurge of emerging industries.

P/E ratio relates stock price and profit, which reflects the recent performance of enterprises. If the stock price rises, but the profit does not change, or even falls, the price-earnings ratio will rise.

Generally speaking, the P/E ratio is:

1-13: that is, the value is undervalued

14-21: that is, the normal level

21-28: that is, the value is overvalued

28+: reflecting the speculative bubble in the stock market

P > P/E ratio of the stock market

dividend yield

Listed companies. Divide the dividend per share of the previous year by the current stock price, which is the current dividend yield. If the stock price is 51 yuan and the dividend last year was 5 yuan per share, the dividend yield is 11%, which is generally high, reflecting the low P/E ratio and the undervalued stock.

generally speaking, the dividend yield of stocks with extremely high P/E ratio (such as more than 111 times) is zero. Because when the P/E ratio is more than 1,111 times, it means that it will take investors more than 1,111 years to return their capital, the stock value is overvalued and there is no dividend.

Average P/E ratio

The average P/E ratio of American stocks is 1.4 times, indicating that the payback period is 2114. 14 times PE translates into an average annual return of 7%(1/14).

If a stock has a high P/E ratio, it means:

(1) The market predicts that the future profit will increase rapidly.

(2) The enterprise has always recorded considerable profits, but a one-off special expenditure occurred in the previous year, which reduced the profits.

(3) There was a bubble and the stock was sought after.

(4) This enterprise has special advantages, and it can ensure that it can record long-term profits under low-risk conditions.

(5) There are limited stocks to choose from in the market. Under the law of supply and demand, the stock price will rise. This makes the comparison of P/E ratio across time meaningless.

Calculation method

The P/E ratio calculated by using different data has different meanings. The current P/E ratio is calculated by the earnings per share of the past four quarters, while the predicted P/E ratio can be calculated by the earnings of the past four quarters, or by the sum of the actual earnings of the last two quarters and the predicted earnings of the next two quarters.

Related concepts

The calculation of P/E ratio only includes common stock, but not preferred stock.

The earnings growth rate can be derived from the P/E ratio. This indicator includes the profit growth rate, which is mostly used in high-growth industries and new enterprises.

What is a reasonable P/E ratio

There is no certain criterion, but for individual stocks, the P/E ratio of the same industry has reference value; In terms of stocks or the broader market, the historical average P/E ratio has reference value.

P/E ratio is an important reference index for individual stocks, stocks and the broader market. If the P/E ratio of any stock greatly exceeds that of similar stocks or the broader market, it needs to be supported by sufficient reasons, which is often inseparable from the key point that the company's future profit is expected to grow rapidly. A company enjoys a very high P/E ratio, indicating that investors generally believe that the company's earnings per share will grow rapidly in the future, so that the P/E ratio will drop to a reasonable level in a few years. Once the profit growth is not ideal, the power supporting the high P/E ratio is unsustainable, and the stock price often falls sharply.

P/E ratio is a valuable stock market indicator, which is easy to understand and obtain data, but it also has many shortcomings. For example, earnings per share, as the denominator, is calculated according to the prevailing accounting standards, but companies often make adjustments as needed. Therefore, in theory, the earnings per share published by two companies with the same cash flow may be significantly different. On the other hand, investors often don't think that the profit figures calculated in strict accordance with accounting standards faithfully reflect the profitability of the company on the basis of going concern. Therefore, analysts often adjust the net profit of the company's formal formula by themselves, such as replacing the net profit with the profit before interest, tax, depreciation and amortization (EBITDA) to calculate earnings per share.

In addition, as a molecule of P/E ratio, the market value of a company can't reflect the debt (leverage) of the company. For example, two companies with a market value of $1 billion and a net profit of $1 billion have P/E ratios of 11. But if Company A has a debt of $1 billion and Company B has no debt, then the P/E ratio cannot reflect this difference. Therefore, some analysts use "enterprise value (EV)"-market value plus debt minus cash-instead of market value to calculate P/E ratio. Theoretically, the ratio of enterprise value /EBITDA can avoid some shortcomings of pure P/E ratio.

several problems that should be paid attention to when comparing the P/E ratios of different markets horizontally

P/E ratio is a very rough indicator. Considering comparability, it is meaningful to compare the P/E ratios of the same index at different stages, but we should be especially careful when comparing the P/E ratios of different markets horizontally.

★(1) The P/E ratio of composite index and composite index, and the P/E ratio of component index and component index. The sample stocks of the composite index include all the stocks in the market (except PT stocks in Shanghai and Shenzhen stock markets), and the P/E ratio is generally high, while the sample stocks of the component indexes are carefully selected, usually with large average share capital and good average performance, so their P/E ratio is relatively low. However, the P/E ratio of foreign stocks we often see is mostly the P/E ratio of component indexes. If we compare them with the P/E ratio of our comprehensive index, we have made a conceptual mistake.

★(2) The P/E ratio should be linked to the benchmark interest rate. The benchmark interest rate is the reference coefficient of people's investment return rate, and it also reflects the level of capital cost of the whole society. Generally speaking, if other factors remain unchanged, there is a positive relationship between the reciprocal of the benchmark interest rate and the average price-earnings ratio of the stock market. If the basic interest rate is low, the reasonable P/E ratio can be higher; if the benchmark interest rate is high, the reasonable P/E ratio should be lower. At present, the rediscount rate of China's central bank is 2.97%, the yield of one-year savings deposits is 1.81%, the federal funds rate of the United States is 1.75%, and the re-posting rate of the Federal Reserve is 1.25%. There is little difference between the benchmark interest rates of China and the United States, but vertically, the current benchmark interest rate in China is very low. According to authoritative research, according to China's current price level and the country's future proactive fiscal policy and moderate monetary policy orientation, China may lower interest rates again.

★(3) The P/E ratio should be linked to the equity. The average P/E ratio is related to both the total share capital and the circulating share capital. The smaller the total share capital and the circulating share capital, the higher the average P/E ratio will be (Stenster Management Consulting China Company, 2111), and vice versa, the lower it will be, both in China and the West. According to statistics, the arithmetic average P/E ratio of 771 sample stocks (excluding PT stocks, ST stocks, loss-making stocks and stocks with earnings less than 1.15 yuan per share in mid-2111) in China Shanghai and Shenzhen stock markets on October 6, 2111 was 29.43 times, among which the arithmetic average P/E ratio of the 111 listed companies with the smallest total share capital was 42.74 times, while that of the 111 listed companies with the largest total share capital was only 19.82 times. In the United States, the average P/E ratio of small-cap stocks is several times higher than that of large-cap stocks, and the market P/E ratio of NASDAQ is higher than that of new york Stock Exchange, which is partly related to the equity factor.

Therefore, when looking at the average P/E ratio of a market, we should also consider the structure of listed companies in this market. If the market is dominated by small equity companies, its reasonable P/E ratio should be higher. If we don't consider the share capital composition of listed companies in the stock market, we can't explain why, even if the original price level of listed companies remains unchanged, as long as we go to Sinopec and then go to PetroChina, China Mobile and CNOOC, the average P/E ratio will be reduced by more than ten times, and the P/E ratio will be reduced to the so-called "reasonable area". In fact, on February 31th, 2111, the P/E ratio of the A-share index of Shanghai Stock Exchange dropped to 37.59 times. If Sinopec has not been listed, this figure will dramatically increase to 43.31 times.

★(4) The P/E ratio should be linked to the capital stock structure. The P/E ratio is also related to the equity structure. If the shares are fully circulated, the P/E ratio will be lower; if the shares are not fully circulated, the P/E ratio of the tradable shares will be higher. The reason is that if the total value of listed companies remains unchanged, shares are divided into tradable shares and non-tradable shares, and the liquidity of assets will increase the value of assets (liquidity premium). Generally speaking, the price per share of tradable shares is naturally higher than that of non-tradable shares. The lower the price of non-tradable shares, the higher the price of tradable shares, and the result is bound to be that the average price-earnings ratio of tradable shares is higher than that of non-tradable shares. The smaller the proportion of tradable shares in China's share capital, the greater the price difference between tradable shares and non-tradable shares, and the higher the average P/E ratio of tradable shares.

At present, non-tradable shares account for two-thirds of the total share capital in China market, and it is normal that the P/E ratio of tradable shares is higher when they are not circulated.

★(5) P/E ratio should be linked to growth. At the same price-earnings ratio of 21 times, the market where the average annual profit of listed companies increases by 7% is far more valuable than the market where the average annual profit of listed companies increases by 3%. According to the classic stock intrinsic value evaluation model, as shown in Formula (1). Where v is the intrinsic value of the stock, d. Is the dividend per share to be paid in an indefinite period in the future, where k is yield to maturity and g is the fixed growth rate of dividend per period. It can be seen from formula (1) that, assuming other factors remain unchanged, growth has a great influence on the intrinsic value of stocks, and thus on the market price and average P/E ratio.

V= D。 (l+g)

k–g (1)

For a simplified example, suppose that the net profit of listed companies and the economy grow synchronously, with an average annual economic growth rate of 7% in China and 3% in the United States, then the average intrinsic value of China stock is 2.42 times that of the United States, and the reasonable price-earnings ratio of China stock market is also 2.42 times that of the United States. From the perspective of growth, it makes sense that the price-earnings ratio of NASDAQ index is relatively high and the average price-earnings ratio of emerging market countries' stock markets is relatively high.

★(6) The P/E ratio is related to some institutional factors, such as the selectivity of residents' investment methods, investment ideas, a country's system (culture, tradition, customs, habits, etc.), foreign exchange control and other institutional factors are all related to the average P/E ratio level.

★(7) The average P/E ratio of China stock market should also consider the issue price factor. Before 1997, with reference to the interest rate level in China at that time, the management strictly controlled the pricing of initial public offerings, and generally the price-earnings ratio of initial public offerings should not exceed 1.5 times. In order to take care of remote areas, stocks like Tibet Jinzhu were paid a price-earnings ratio of about 21 times. Later, in order to promote the market-oriented reform of the securities market, the control of issuance pricing was gradually relaxed. Mindong Electric Power reached a price-earnings ratio of 88 times when it was issued in 2111, and the average price-earnings ratio of ordinary stocks was maintained at 41 to 51 times. The issue price-earnings ratio can be forty or fifty times. How can the average price-earnings ratio of the secondary market be said to be abnormal? Theoretically speaking, the higher the P/E ratio, the more funds raised, the stronger the potential development and profitability of listed companies, and the higher the gold content of listed companies' book assets, which can not be seen from the static price earning ratio. Since the static price earning ratio does not fully reflect the influence of the higher P/E ratio in recent years, it is normal that the average P/E ratio in the secondary market is slightly higher than that in previous years.

price earning ratio's defects in judging the investment value of the stock market

price earning ratio has some inherent defects in judging whether the average price of the stock market is reasonable:

★(1) The calculation method itself is defective. The choice of sample stocks of constituent stock index is arbitrary. The average P/E ratio calculated by various countries and markets is related to the sample stocks selected. If the sample is adjusted, the average P/E ratio will also change. Even in the composite index, there is a problem that the impact of loss-making stocks and low-profit stocks on P/E ratio is discontinuous. For example, on February 31, 2111, the P/E ratio of A shares in Shanghai Stock Exchange was 37.59 times. If Sinopec made a profit of 1.11 yuan instead of 16.154 billion yuan in 2111, the P/E ratio of A shares in Shanghai Stock Exchange would rise to 48.53 times. More ironically, if Sinopec loses money, it will be excluded from the calculation of P/E ratio, and the P/E ratio of A shares in Shanghai Stock Exchange will be reduced to 43.31 times, which is really called "the more losses, the lower the P/E ratio".

★(2) price earning ratio is very unstable. With the cyclical fluctuation of the economy, the earnings per share of listed companies will fluctuate greatly, and the average price-earnings ratio calculated in this way will also fluctuate greatly, so as to regulate the stock market, which will inevitably bring about stock market turmoil. In 1932, when the American stock market was in the lowest ebb, the P/E ratio was as high as more than 111 times. It would be absurd and dangerous to squeeze the stock market bubble based on this. In fact, that year was the best time to enter the market in the history of the United States.

★(3) Earnings per share is only one factor affecting the investment value of stocks. Investors don't have to look at the P/E ratio when choosing stocks. It is difficult for you to arbitrage according to the P/E ratio, and it is also difficult to say that a certain stock has investment value or no investment value according to the P/E ratio. It is puzzling that the P/E ratio is so poor in explaining the value of individual stocks that it is used as the most important basis to measure whether the stock market has investment value. In fact, the value or price of a stock is determined by many factors, and it is unscientific to judge whether the stock price is too high or too low by using the price-earnings ratio as an indicator.

Correctly treat the price-earnings ratio

In the stock market, when people completely apply price earning ratio to measure the stock price, they will find that the market becomes unreasonable.