The calculation formula of P/E ratio is: P/E ratio = market value/net profit. A simple understanding is the ratio of the price of a stock to its earnings per share. For example, the share price of a stock is 20 yuan, and the earnings per share of the previous year is 1 yuan, so the P/E ratio is = 20/ 1 = 20.

P/E ratio can be used to measure whether the price of a stock deviates from its value. If the price-earnings ratio is high, it may indicate that there is a bubble in the stock and the stock price is overvalued, so the thick stock price may collapse and fall back to its real share price.

Conversely, if the P/E ratio is too low, it implies that the company's value is lower than the current price, and the stock price may be undervalued. The share price in the afternoon is likely to rise and eventually rise to its real share price.

Reasonable price-earnings ratio

According to past data, the general P/E ratio is lower than 15, which can be regarded as a low P/E ratio, and the stock price may be underestimated. P/E ratio higher than 20 indicates that the stock price is overvalued.

And stocks with high P/E ratio generally appear when the company's prospects are good. Moreover, the calculation of P/E ratio will be biased and lagging behind, so P/E ratio can only be used as a reference, and it cannot be simply understood that the lower the P/E ratio, the better or the higher the P/E ratio, the worse.

Different industries should have different P/E ratios. For example, the price-earnings ratio of bank stocks is between 5-10 times all the year round, but the stock price just does not rise. Moreover, the price-earnings ratio of some pharmaceutical companies or technology companies is very high, 30 -60 times, and some are as high as 100 times, but the stock price has been hitting a new high. Therefore, a low P/E ratio does not mean that stocks are good, and a high market surplus does not mean that stocks are poor.