Price-earnings ratio Price-earnings ratio Price-earnings ratio refers to the ratio of a stock's price to earnings per share within an examination period (usually 12 months).
Investors often use this ratio to estimate the investment value of a stock or to compare stocks of different companies.
The P/E ratio is often used as an indicator to compare whether stocks of different prices are overvalued or undervalued.
However, using the P/E ratio to measure the quality of a company's stock isn't always accurate.
It is generally believed that if the price-to-earnings ratio of a company's stock is too high, then the stock's price is frothy and its value is overvalued.
However, when a company is growing rapidly and its future performance growth is very promising, the stock's current high P/E ratio may just be an accurate estimate of the company's value.
It should be noted that when using the P/E ratio to compare the investment value of different stocks, these stocks must belong to the same industry, because at this time the company's earnings per share are relatively close, and comparisons with each other are valid.
As of July 3, 2007, the P/E ratio of A-shares in Shanghai and Shenzhen Stock Exchanges was 85.19.
How Calculated Earnings per share is calculated by dividing the company's net income over the past 12 months by the total number of shares sold.
The lower the P/E ratio, the lower the price for investors to buy stocks in order to obtain returns.
Assume that the market price of a stock is 24 yuan, and the earnings per share in the past 12 months is 3 yuan, then the price-to-earnings ratio is 24/3=8.
The stock is considered to have a price-to-earnings ratio of 8 times, meaning that for every $8 paid, one dollar of profit can be shared.
Investors calculate the P/E ratio primarily to compare the value of different stocks.
In theory, the lower the P/E ratio of a stock, the more worthwhile it is to invest.
Comparing P/E ratios across industries, countries, and time periods is unreliable.
It is more practical to compare the price-to-earnings ratios of similar stocks.
Factors that determine stock price Stock price depends on market demand, that is, in disguise, it depends on investors' expectations for the following: (1) The company's recent performance and future development prospects (2) Newly launched products or services (3) The prospects of the industry
Other factors that affect stock prices include market sentiment, emerging industry boom, etc.
The P/E ratio links stock price to profits and reflects a company's recent performance.
If the stock price rises but profits remain unchanged or even fall, the P/E ratio will rise.
Generally speaking, the price-to-earnings ratio level is: 0-13: that is, the value is undervalued 14-20: that is, the normal level 21-28: that is, the value is overvalued 28+: reflects the emergence of speculative bubbles in the stock market. The price-to-earnings ratio of the stock market, dividend yield, listed companies usually
Part of the profits will be distributed to shareholders as dividends.
The current dividend yield is the last year's dividend per share divided by the stock's current price.
If the stock price is 50 yuan and last year's dividend was 5 yuan per share, the dividend yield is 10%. This number is generally on the high side, reflecting that the price-to-earnings ratio is low and the stock is undervalued.
Generally speaking, stocks with extremely high price-to-earnings ratios (such as greater than 100 times) have zero dividend yields.
Because when the P/E ratio is greater than 100 times, it means that it will take more than 100 years for investors to recover their capital, the stock value is overvalued, and no dividends are paid.
Average price-to-earnings ratio The average price-to-earnings ratio for U.S. stocks is 14 times, indicating a payback period of 14 years.
The average annual return rate of 14 times PE is 7% (1/14).
If a stock has a high P/E ratio, it means: (1) The market predicts fast earnings growth in the future.
(2) The company has always recorded considerable profits, but one-off special expenses occurred in the previous year, which reduced profits.
(3) A bubble appears and the stock is sought after.
(4) The company has special advantages that ensure 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 comparisons of P/E ratios across time less meaningful.
Calculation method The price-to-earnings ratio calculated using different data has different meanings.
The current P/E ratio is calculated using earnings per share over the past four quarters, while the forecast P/E ratio can be calculated using earnings per share over the past four quarters, or it can be calculated based on the sum of actual earnings for the past two quarters and forecast earnings for the next two quarters.
Related Concepts The calculation of the P/E ratio includes only common stocks, not preferred stocks.
The price-to-earnings growth rate can be derived from the price-to-earnings ratio. This indicator adds the factor of earnings growth rate and is mostly used in high-growth industries and new companies.
There is no certain standard for what is a reasonable P/E ratio, but for individual stocks, the P/E ratio of peers has a reference value; for stocks or the market, the historical average P/E ratio has a reference value.
The price-to-earnings ratio is an important reference indicator for individual stocks, stocks and the broader market.