In securities, P/E index has other names such as P/E ratio, P/E ratio, PE index… which stands for Price to Earning Ratio (PER),

Through this article, you will understand:

What is PE, P/E ratio?How to calculate P/E – PE ratio The meaning of P/E ratio Valuation of stocks according to P/E – PE method how much is good and reasonable.

Viewing: What is the p/e ratio

Stock valuation formula and factors affecting the P/E ratio Illustrated example of the P/E ratio Other notes about the P/E ratio

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1. What is PE – P/E ratio

?P/E ratio stands for Price to Earning Ratio (PER), some other names such as P/E ratio, P/E ratio;

P/E ratio is one of the tools to evaluate stocks when investing in stocks

The main P/E ratio is equal to the number of years that an investor breaks even when investing in the business, if profits are constant.

A famous investor who values ​​P/E ratios is John Neff…

2. How to calculate PE – P/E ratio.

According to the above figure, we have the formula:

P/E = Market price / EPS

Or P/E = Company capitalization / Profit after tax

Where: P = Price = Market Price: Market price at the time of transaction.EPS = Earning Per Share: Net profit of a stock

EPS formula: = (Earnings after tax – Preferred stock dividends) / Total number of common shares outstanding)

Eg:

If the share price of Vinamilk VNM shares sold on the stock market is VND 150,000 and earnings per share is VND 7,500, then the P/E ratio will be 20 (=150,000 / 7,500), which means the investor willing to pay 20 dong for every 1 dong of profit Vinamilk earns in 1 year. If the P/E Ratio drops to 10, it means that the investor only pays 10 VND for every 1 VND of profit.

Simple understanding: P/E = Number of years to break even (If profit is constant)

P/E is calculated based on data of 4 consecutive quarters.

Investors should distinguish two types of P/E: those that take earnings for the previous four quarters (called trailing P/E) and those that forecast earnings for the next four quarters (called forward P/E or P/E). projections). When speaking simply P/E, it should be understood as trailing P/E.

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For example, Vinamilk’s P/E is 20, a fairly reasonable number, but if Vinamilk grows by 30% next year, its forward P/E is 15.4, which is considered quite cheap.

If you wonder if it’s better to use forward P/E or trailing P/E, it’s like asking which orange and apple are better. That’s the best answer.

3. Meaning of P/E ratio, What does P/E ratio say

?P/E ratio is understood as how much investors are willing to pay for 1 dollar of profit.

What does a low P/E ratio mean?

Stocks are undervaluedThe company is having problems (financial, business…)

Meaning of high P/E ratio:

The stock is overvalued. The future prospects are very good. The profit is small but temporary. The company is at the bottom of the business cycle – cyclical stocks

4. Valuation of shares by P/E method: How much P/E ratio is good and reasonable?

P/E ratios only have a real effect when they are in the same circumstances and conditions. Some factors affect P/E such as growth rate, competitive advantage, financial safety or risk, business industry, macro conditions such as inflation, interest rates, growth rate, etc. GDP growth… of the country…

When the business, financial, and macro conditions are the same, the lower the P/E ratio, the better.

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It is very difficult to really assess how good or reasonable the P/E ratio is, but the Horse tries to be more specific, if you value P/E, note the following points:

Is the company growing fast or not (if it only grows by 5-7% but still has a very high P/E, it shows that the stock price is too high); What is the P/E ratio of the industry (compare P/E of it makes no sense for a power company with a high tech company’s P/E). The P/E ratio will be inversely related to these two factors. Risk factors of the enterprise: such as financial risks such as debt, or business risks: The ability to penetrate the industry, governance risks such as: honesty…Is this a cyclical company?

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etc…

However, if a stock investor is purely about using P/E, Ngo would suggest that investors should only consider businesses with a P/E of 15, you have to make sure this is a good quality company, or you value the stock based on another method.

High P/E is usually riskier than low P/E, (of course if you understand – based on the above, and you are stupid, low P/E will still kill you) High P/E Also often associated with growth companies, low P/E is a common feature of value stocks.

As for Ngo himself, the Happy-Fund fund owns both stocks with very high P/E index P/E > 20, and stocks with relatively low P/E P/E.

5. Formula for stock valuation according to the P/E . method

Horse adds the formula of determination Stock price and the components of the P/E ratio, the formula for a company’s steady growth:

The above formula shows that the factors that can affect the P/E ratio are as follows:

Dividend Payout Ratio – b Dividend Paid – DIV Required Rate of Return – r

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In addition, the required rate of return r according to the CAPM model is also influenced by the coefficient, the market rate of return rm, and the risk-free rate rf through the formula:

r = rf + ( rm – rf )

In addition to the above factors, there are other factors such as: P/E of the whole market, P/E of the whole industry, financial leverage and some other financial indicators such as ROA, ROE, D/E, Debt

So if you see a stock with a P/E significantly lower than the stock valuation above, congratulations!

6. Example of P/E ratio

6.1 P/E ratio of Vinamilk stock

Comment:

Vinamilk’s P/E has always remained at a high level for the past 4 years and is higher than the market average: 17.22, 15.73, 21.92, 21.5

The fact also proves that buying Vinamilk shares with high P/E is a bargain. Vinamilk’s stock price has always increased during the time since listing until now.

The meaning of Vinamilk’s high P/E ratio is: Vinamilk’s prospects in the future are very good, so investors are willing to pay more than 20 dong for 1 dong of Vinamilk’s profit.

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6.2 P/E ratio of stock ROS

The P/E of ROS stock is so high it’s inflated

ROS’s P/E: P/E = 245, which means you’ve waited more than 2 centuries to get your capital back, or that an investor believes ROS is the next Amazon.

If you go back to the P/E ratio meaning, you’ll see that the ROS is in this case: Far exceeding the true value. If you hold ROS for a long time, you will have 1 ability Sun Wukong is to turn: A house into a thatched hut.

Update: Currently (March 3, 2019) ROS stock has decreased more than 5 times compared to this writing.6.3 Vinasun’s P/E ratio: (code VNS)

P/E of VNS is less than 4.0, this is a very low P/E ratio,

The meaning of Vinasun’s low P/E ratio (as of October) by 1 of 2 main meanings:

Investors are thinking the future of Vinasun is quite bleak, currently Vinasun’s profit is falling sharply, due to competition with Uber and Grab, then P/E will automatically increase again, so it is not a good deal. bargain, even expensive. Vinasun is undervalued, because investors have exaggerated the gloomy future, with Vinasun’s background, and it will still maintain its position at an acceptable and worthy level. worth the higher price.

Ngo gives 3 examples above for the purpose: Assessing how much P/E is good and reasonable is not simple, it is not a rigid number, but also depends on many other factors.

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Learn a course on fundamental analysis and value/growth investing, which Horse will support until you master it, here.

7. Notes on the P/E ratio

P/E is a simple and easy to calculate metric, as well as an effective investment valuation tool, but there are a few things you need to keep in mind:

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