# Relationship between price-earnings ratio and stock price

Source: Internet
Author: User
The price-to-earnings ratio or benefit-to-earnings ratio is the ratio of the stock market price to earnings per share. The formula is as follows:

Price-earnings ratio: current market price per share/post-tax profit per share

Price-to-earnings ratio is an important indicator to measure the stock price and enterprise profitability. Because the price-to-earnings ratio combines the stock price with the company's profitability, its level reflects the stock price more realistically. For example, if the earnings per share of two stocks of 50 yuan are 5 yuan and 1 yuan respectively, the price-to-earnings ratio is 10 times and 50 times, respectively, that is to say, the current actual price level is 5 times different. If the profitability of an enterprise remains the same, it means that the two types of stocks bought at the same price of 50 yuan can be withdrawn from the enterprise profit after 10 and 50 years respectively. However, as the profitability of an enterprise is constantly changing, investors pay more attention to the future of the enterprise when buying shares. Therefore, even if the current price-to-earnings ratio is high for companies with good development prospects, investors are willing to buy. Companies with high expected profit growth will also have a high price-to-earnings ratio. For example, for two companies whose earnings per share for the previous year are the same as RMB 1, if Company A maintains a profit growth rate of 20% every year in the future, Company B can only maintain a growth rate of 10% every year, so by the tenth year, Company A's earnings per share will reach 6.2 yuan, and Company B only has 2.6 yuan. Therefore, the current price-earnings ratio of Company A must be higher than that of Company B. If investors buy the company's shares at the same price, their investment in Company A can be withdrawn earlier.

To reflect the price levels of stocks in different markets or industries, you can also calculate the overall price-to-earnings ratio of each market or the average price-to-earnings ratio of listed companies in different industries. The specific calculation method is to divide the total market price of all listed companies by the total after-tax profits of all listed companies to obtain the average price-earnings ratio of these listed companies. There are many factors that affect the overall price-to-earnings ratio of a market. The two most important factors are the economic development potential and market interest rate of the region where the city is located. Generally, listed companies in the emerging securities market have good development potential and a high profit growth rate. Therefore, the overall price-to-earnings ratio of the emerging securities market is higher than that of the mature securities market. The stock price-to-earnings ratio of developed countries, such as Europe and America, is generally between 15 to 15 ~ About 20 times. In contrast, the stock market in some developing countries in Asia is usually at a price-to-earnings ratio of about 30 times. On the other hand, the reciprocal of price-earnings ratio is equivalent to the expected profit margin of Stock market investment. Therefore, due to the role of social capital in pursuing the average profit rate, the reasonable price-to-earnings ratio of a country's securities market also has a reciprocal relationship with the market interest rate level.
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