PE valuation is only applicable to businesses with relatively stable operation

PE valuation is only applicable to businesses with relatively stable operation 

I don't think PE is very operational for most industries. It is indeed very intuitive, but the main problem is that the valuation premium based on the current net profit is very unstable. Because the net profit is the most adjustable financial indicator, the recognition of revenue (for example, engineering companies can adjust through the degree of completion), the recognition of cost allocation (for example, the detailed recognition of depreciation and inventory), the recognition of expense attribution (for example, whether R & D is fully accrued or partially capitalized) and the adjustment space in nonoperating revenue and expenditure, So it is a problem to judge the true profit level of enterprises.

Moreover, the external factors affecting the profits of some industries with strong cycles are decisive (such as the rise and fall of bulk commodities, the cyclical drastic changes in supply and demand, etc.), and the net profits show ups and downs. The PE valuation under this business characteristic is also unreasonable.

In addition, the P / E ratio is of little use to companies that have huge growth space in the future, but are just in the initial stage of growth, as well as businesses where the cost and traffic of Internet companies are in front and the profit is behind. Such companies are the most important to make qualitative judgments on business prospects, company quality, and competition patterns.

So I think PE valuation is only applicable to businesses with relatively stable operations and not prone to large fluctuations in the long-term pattern, but the question is, is PE still used to value such businesses? Therefore, this is a difficult problem for investment, that is, it is difficult to find good investment opportunities through simple valuation data calculation. Of course, if there is a comprehensive high valuation or low valuation in extreme areas, it can be identified according to the data (only systematic opportunities can be identified, not specific companies). After all, it is not necessary to know whether a person is a fat or not.

It is natural that the P / E ratio is not closely related to the balance sheet, because it is not set up out of concern for this issue. Therefore, we can only rely on other valuation indicators, such as price to book ratio and cash flow related indicators, to comprehensively examine the company's operating conditions through roe, ROIC, and other indicators. Any indicator is meaningful, but the significance of any indicator itself is limited. The two are not contradictory.