Limitations of P / E valuation

P / E ratio is one of the valuation methods we have been using. It can be said that all friends who make investments will contact and use this valuation method. But in the process of using this index, we should also know the limitations of the P / E valuation.

Starting from the P / E ratio itself, it is a relative index. It is clear to all of us that since it is a relative index, we should find a judgment benchmark. In the practical application process, we do the same. When looking for the benchmark, there are generally two situations. One is to compare the present data with the historical data. We call it vertical ratio and the other is the comparison between the present data and the historical data One is to compare the current enterprise data with the data of the whole market. We call it horizontal ratio. The comparison benchmark of these two methods is different, and different conclusions may be drawn. How should we deal with them when the two methods conflict?
For example, an enterprise, judging by the method of vertical ratio, is in the undervalued range of valuation, and the absolute value itself may not be low. This has a certain relationship with the data interval taken in the longitudinal ratio. For example, the vertical ratio takes the data of five years to calculate the average value, and then compares with the current data. If the valuation level of the company has been relatively high in the past five years, then the estimation will be conducted The value center is also on the high side naturally. Compared with the whole market, the valuation level may be higher. Especially in bear market, the valuation level of all stocks has a process of decline. However, it is possible that the decline of target stocks is relatively small, so the vertical ratio will appear to be cheaper and the horizontal ratio is still more expensive. This phenomenon will occur The decision-making is going to be careful.
From a conservative point of view, only when the horizontal ratio and vertical ratio fall into the buying range is the investment object worth our consideration. The investment itself is conservative. It is better to miss it than buy it wrong. If the overall valuation level of the market is 30 times, and the valuation level of your target stock is 40 times, and it is still lower than the valuation center, it indicates that the target stocks are estimated in the past few years The value level is relatively high (of course, it is the overestimation caused by the excellent enterprise), so we should consider, can the enterprise continue to grow at a higher and higher speed in the future? If such high valuation continues, if the growth rate of enterprises is down, it will lead to a rapid decline in valuation. There is a possibility of double kill. In the process of investment, if you encounter a double kill, you may lose more than 50% of the principal. It is better to be stable at this time.
From the historical experience, when the conclusion of horizontal ratio and vertical ratio is inconsistent, it should be handled by conservative principle, rather than operation, investment and risk-taking. Of course, some investment opportunities may be lost, but it is better than loss of principal. Only when the valuation is really undervalued, it is necessary to meet the underestimate of horizontal ratio and vertical ratio before it can be satisfied It's good to get out of the cell phone.
Above is a small part of the limitations of the P / E valuation of the relevant introduction, hope to help you.