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Low P/E ratio means undervalued, and stocks are worth buying?

Edit: Lisa
Source: Rong 360 original
Date: 2018-12-04

Summary:

A low P/E ratio means that the value of the stock or index is undervalued, and the probability of a rise after buying is even greater. Is that true?

When we buy stocks or index funds, we often see the word P/E, which is used to evaluate the valuation of stock prices or indices. Generally speaking, the lower the price-to-earnings ratio, the lower the stock price, and the greater the potential for later growth.

For example, the CSI 500 index continued to fall this year. The P/E ratio fell to 18.90 times at the end of November, and fell to 16.74 times in October, which is close to the historical lowest P/E ratio in November 2008. Therefore, the market generally believes that the CSI 500 index has entered a low valuation stage, and now is a good time to enter.

The weighted P/E ratio of the CSI 500 Index in the past decade

Then, Rong 360 financial analysts today said, what is the price-earnings ratio? A low P/E ratio means being undervalued. Is stock or stock index worth buying?

**What is the price-earnings ratio?**

The price-earnings ratio is also called the P/E ratio. The English name is Price earnings ratio, which is P/E ratio. The P/E is also common. It refers to the stock price return ratio or the market price profit ratio. The stock price is divided by the annual earnings per share. (EPS) concludes that earnings per share is the after-tax profit per share of common stock, which is earnings per share.

The common formula is: P/E ratio = stock price / earnings per share

However, since the company's share capital is constantly expanding, it will dilute the earnings per share and stock price, so sometimes it will be calculated by dividing the company's market value by the net profit.

The formula is: P/E ratio = company market value / net profit

Simply put, the price-to-earnings ratio is the ratio of stock price divided by earnings per share. The stock price is high, the earnings per share is low, and the price-earnings ratio will be high, indicating that the stock price is too high, or the profit level is too low, such stocks will be overvalued, and then buying it will be more dangerous.

Conversely, if a stock's stock price is relatively low, but the earnings per share is high, and the price-earnings ratio is low, it means that the stock value is undervalued, and the probability of future rise is higher.

**The P/E ratio indicates how many years it takes for the company to recover its cost according to the current profit level, or how many years of profit the company needs to achieve the current market price. The lower the P/E ratio, the better. The lower the investment recovery period, the lower the risk. The value of investment is higher, and vice versa.**

**for example**

An air-conditioner manufacturer issued 100 shares, and the price per share is now 10 yuan. The company earned 100 yuan last year. We can draw a few data.

The market value of the company = the number of shares × stock price = 100 × 10 = 1000 yuan; last year earnings per share = last year earnings / stocks = 100 ÷ 100 = 1 yuan; price-earnings ratio P / E = stock price / earnings per share = 10 ÷ 1 = 10 Times.

According to the current profit level, this air-conditioning manufacturing company needs 10 years to recover the cost.

Another point to be aware of is that the return on investment is the reciprocal of the price-to-earnings ratio, which is 10%, which is equivalent to an investor's annualized rate of return of 10%.

**P/E ratio is also divided into static P/E ratio, dynamic P/E ratio, and rolling P/E ratio.**

**1. Static P/E ratio**It is the price-earnings ratio that is widely discussed and is the ratio of the current market price divided by the known recent public earnings per share. For example, in the case of the above air conditioner company, the earnings per share were used last year.

The shortcomings of the static P/E ratio are obvious, because the company's profitability is not static. If the data for the whole year of last year is still used in the second half of this year or at the end of the year, it is obviously a lot behind.

**2. Dynamic P/E ratio**The predicted future earnings per share are used. For example, air-conditioning companies have better sales this year, and their profits have increased. It is expected to earn 200 yuan for the whole year, that is, the earnings per share is 2 yuan, and the price-earnings ratio is 5 times. The company can recover costs in just 5 years, and the annualized rate of return of investors has increased to 20%.

However, there is obviously a problem with the dynamic P/E ratio, that is, no one can accurately predict the future profitability, especially at the beginning of the year, the probability of misalignment is higher.

**3, rolling P/E ratio**It neutralizes the shortcomings of static P/E ratio and dynamic P/E ratio. It uses the earnings per share for the past year. For example, it is now December, using the profit data from the fourth quarter of last year to the third quarter of this year. Although the static P/E ratio and the rolling P/E ratio are all historical data, the latter is closer and more realistic.

**Is the P/E ratio displayed on the software true?**

We can usually see the price-to-earnings ratio of a stock in the stock software, which is very intuitive and you don't have to calculate it yourself. But the 360 financial analysts have to say that the software's price-earnings ratio is more distorted than the above three price-earnings ratios.

This price-earnings ratio is based on the company's latest earnings report (quarterly report), and then launched the full year's data, but for companies with strong periodicity, this data obviously does not work.

Take the above air-conditioning manufacturing enterprises, it is obviously the best-selling in summer, so the income in the second and third quarters is higher, and the income in the first and fourth quarters is lower, especially after heating in the north, the air conditioner is basically not used in winter. The annual income you calculate from the second quarter's income will be artificially high.

However, for the index, especially the wide index, the software price-earnings ratio reference is relatively large. First, the index generally contains dozens, hundreds or even thousands of stocks, which will offset each other's cyclical factors, and the individual is also very Difficult to calculate, according to the weight of different stocks in the index, the software will get a comprehensive weighted P/E ratio, which will be relatively accurate.

**P/E ratio is not the only dimension to measure the value of a stock or index**

After figuring out what the price-to-earnings ratio is all about, let’s see if the P/E ratio can be used as the sole criterion for measuring the value of a stock or index. Obviously not.

For example, for industries with strong cyclicality, the industry is at the bottom of the cycle, and the stock price-earnings ratio in the industry is usually higher, but this does not mean that these stocks have no investment value, because at the top of the cyclical, the stock price-earnings ratio will rise.

In addition, the stock price-earnings ratio of different industries can not be put together. For example, the steel and coal industries belong to the sunset industry, and the artificial intelligence industry belongs to the sunrise industry. Although the former is more profitable than the latter, you can say the development prospects of the former. Better, is stock more worth investing?

It should be said that the price-earnings ratio is a reference indicator for entry-level investors or citizens. It lays the foundation for investment, but the stock market is too esoteric. To truly understand it, we must have more in-depth exploration.

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