The relative valuation method uses indicators such as P/E and P/B to measure the valuation level. The first absolute valuation method is the dividend discount model. This model takes all dividends paid by the company over the next few years as cash flows, discounts them at your expected rate of return, and aggregates them into a total value. The higher the dividend yield, the lower the expected earnings, and the higher the current valuation. The second common absolute valuation method is the free cash flow model, which discounts the free cash flow according to the expected rate of return. The overall idea is similar to the DDM model above, which is more accurate and complex, and is not suitable for retail investors to calculate by themselves. The free cash flow model is suitable for enterprises with high valuation stability, because most of them have negative cash flow and their growth is not clear for some newly established or growing enterprises. After saying absolute valuation method, let's look at relative valuation method. Relative valuation is usually the ratio between several indicators. For example, P/E ratio, P/B ratio, etc. P/E ratio is equal to stock price divided by earnings per share EPS, and P/B ratio is equal to stock price divided by net assets per share. These two indicators can compare different types of objects together to see their stock price at the same level of earnings or net assets. Relative valuation method is the most commonly used valuation method in the capital market at present, which is simple and effective and convenient for comparison. When using P/E ratio analysis, we can start from two dimensions: one is horizontal comparison between overseas markets and other companies in the same industry in China, and the other is vertical comparison of historical performance.
Although the relative valuation method can comprehensively understand the value of the company, several principles should be paid attention to when using it: first, the applicable proportion is different in different industries, some are suitable for the P/E ratio, some are suitable for the price-to-book ratio. Generally speaking, P/E ratio is suitable for industries with weak periodicity, such as service industry and general manufacturing industry, because such enterprises have low earnings volatility, P/E ratio is relatively stable, while the steel and coal industry is greatly affected by cycles, and its earnings often fluctuate, so it is not suitable for P/E ratio. The price-to-book ratio is suitable for cyclical industries, such as petrochemical, steel and banking, because the book value of these industries is relatively stable, so the price-to-book ratio is relatively stable. Second, different industries have their own particularities, so the valuation results of the same index are very different and cannot be directly compared.
The P/E ratio in the relative valuation method can measure most enterprises. When using relative valuation method, there are two perspectives: horizontal comparison and historical comparison. Absolute estimation Some special stocks may lack flexibility for guiding enterprises. The number of stocks that may be invested by enterprises in a wide range of industries with unimaginable scale is dozens of times that of GE enterprises. Therefore, if the value parameter of enterprise stock is estimated by using absoluteness, the investment efficiency and investment rate of giant enterprises may be reduced to a range that they do not expect. Therefore, it is strongly suggested that the method of estimating the stock value index based on the nature of relativity may be suitable and long-term reliable for investment enterprises with almost no mandatory or perfect requirements. Note that when you or the stock parameter analyst use the estimation method of relative nature, the solutions brought by different perspectives may cause your differences or even disharmony. The comparison of different scales and scales is worth your in-depth study and consideration in a long period of historical analysis.
