Thirdly, the proportion of large-cap blue-chip stocks listed is small, and small-cap stocks account for a relatively large proportion. The price-earnings ratio of most stocks is dozens of times. Does this also mean that A shares as a whole are overvalued? Let's explain how to understand the P/E ratio and whether A shares are overvalued from several aspects.
Correctly understand the meaning of P/E ratio
The formula of P/E ratio is current share price/earnings per share. If the stock price is higher, the P/E ratio will increase when the stock price rises sharply, so the stock price will be overvalued. When earnings per share decrease, the company's net profit will decrease and its equity per share will also decrease. At this time, the price-earnings ratio will also become higher. The change of two variables will affect the change of P/E ratio. Here is a case to make you understand the actual meaning of P/E ratio more clearly.
For example, at that time, the stock price was 10 yuan, and now the annual report of the company shows that the earnings per share is 0.5 yuan. When calculating the company's profitability, we like to take the year as the unit to represent the company's annual profitability. Present value of shares held by 0.5 yuan. For example, if the company's annual profitability and share price remain unchanged, we need 0.5 * 20 = 10 yuan. Therefore, it takes 20 years for a company to earn 0.5 yuan a year, which should be easier for everyone to understand. If you understand my case above, everyone knows that the company's annual net profit has changed, which leads to a calculation method of valuation.
Due to the large market value, stable industry status and relatively questionable annual net profit, the growth of large-cap blue-chip stocks is poor. However, for some listed companies with relatively small market value, there is great uncertainty in their later performance, which is likely to increase substantially, resulting in a substantial increase in earnings per share. At this time, the P/E ratio will drop rapidly, because this kind of stock has good growth, although according to our interpretation above, it will take 20 years to return to the capital under the condition of constant income, and it may take only 5 years to return to the capital after the performance suddenly increases sharply.
Therefore, when we estimate the price-earnings ratio, the growth of the industry is different, and the reasonable valuation must be very different. We can't use a unified price-earnings ratio to evaluate every company and every sector. The growth of large-cap blue-chip stocks is poor, and there is no possibility of a substantial increase in performance. Therefore, the reasonable P/E ratio is relatively low, which may be ten times or dozens of times, while the reasonable valuation of small-cap growth stocks is relatively high. It may be dozens of times, leaving a problem here, and many investors will be confused. Since growth is different, that is the future. Now the valuation is the key. If there is any loss in the future, you can't just think about it. This sentence is correct. Here we need to explain the logic of individual stocks rising.
We all know that when we investors buy a company, we don't really care about the current value of the company. If we invest according to the current value of the company, the wealth will not increase at all, and there will not be many companies optimistic about the information of Hong Kong capital. If you are optimistic about this company, you will be optimistic about its future situation, and the funds for future development will increase in value. We will also invest in stocks. We are optimistic about the future of the company, not the present. Whether the company is good in the future, will there be a large-scale profit, that is, whether the company grows well or not, while the growth of large-cap blue-chip stocks is poor, and the probability of bringing substantial value-added in the later period is low, so the stock price is relatively low and the P/E ratio is relatively low, while the probability of bringing substantial value-added in the later period of small-cap technology stocks is high. Even if the current valuation is significantly higher than that of large-cap stocks, there are still many funds willing to invest. Let's refer to the valuations of various industries:
Through various industries
Summary: We interpret the reasons for the inconsistency of reasonable P/E ratios in various industries through easy-to-understand cases. The large-cap blue-chip stocks have low P/E ratio and low valuation, mainly because of poor growth and low late return, while the small-cap technology companies have higher P/E ratio than the large-cap blue-chip stocks, mainly because of good late growth and possible substantial increase in future value, so the fund has given a reasonable valuation scale to each industry during the investment process. Therefore, when we understand the overall valuation of the stock market, we can't compare the price-earnings ratio of small-cap stocks with that of large-cap blue chips, nor can we think that the market valuation is too high when the price-earnings ratio of most small-cap stocks is dozens of times.