| The P/E ratio is the market price per share of a firm's common stock divided by the most recent 12 months of earnings per share. It plays a very important role in financial analysis, and it's a main measure when investors make decisions. In order to judge the price of certain market or certain industry, we could calculate the market price-earnings ratio. The investors could distinguish market risk by analyzing the market price-earnings ratio, and gain higher return by studying the price-earnings ratio of companies. At first, we compare and analyze the relationship between the market price-earnings ratio of Shanghai Stock Exchange and Shenzhen Stock Exchange and three economic factors: the growth rate of GDP, the circulating rate of the whole market and the annual deposit interest rate. We found that the market price-earnings ratio is positive with the GDP's growth rate but negative with the interest rate. Therefore when we evaluate the investment value of a stock market, we'd better not just compare the market price-earnings ratio of different countries and jump to conclusion. We should also focus on the factors that are influencing the ratio. Next, we found that the price-earnings ratio includes the potential growth of the company's earning by analyzing the data of Shanghai Stock Exchange. If a company has a higher price earnings ratio, it would have higher earnings per share growth rate. Moreover, there is a certain degree of the low price-earnings ratio effect existing in Chinese stock market. We use the cumulative adjusted returns (CAR) to evaluate future stock returns of investors and found that the portfolios with low price-earnings ratio could have a higher future excess return. At the end of the paper, we give some pieces of advice to investors on how to use the price-earnings ratio in Chinese stock market. |
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