P/E ratio are as follows.
is too influenced by profits. The profits of many cyclical companies are not stable. When they are good, they can make a lot of money, but when they are bad, they can lose a lot of money. Therefore, large changes in profits make it difficult to maintain a continuous price-to-earnings ratio. For example, a company's stock price is 10 yuan per share. The profit per share is 1 yuan, and the price-to-earnings ratio is not high, only 10 times. But next year its performance may plummet, and the earnings per share are only 01 yuan. Then even if the stock price falls by half, the price-to-earnings ratio can instantly expand to 50, which is higher than 10 on the surface. If you operate according to the P/E ratio mechanically, buying when it is undervalued and selling when it is overvalued, you will lose 50%.
(2) The price-to-earnings ratio relies too much on corporate profits. The profit in corporate financial reports is very easy to be manipulated. Readers who have done finance know that the data in the income statement are actually unreliable because there are too many factors that can significantly reduce profits, such as selling some assets. Profits increase. Therefore, generally prudent investments will use non-net profits to calculate the price-earnings ratio, but even so, the profits may not be reliable.
(3) P/E ratio has a blind spot for leverage . For example, even if the profit is doubled, some companies make it entirely by relying on their own funds, while some companies double the leverage and make it by borrowing money. Then the financial status of these two companies is completely not reflected in the price-earnings ratio. In fact, it is obvious that the company that uses its own funds is better and the company that borrows money has much higher risks. This is because companies that borrow money can magnify profits when they make money, and magnify losses when they lose money.
