Investment solutions for the P / E multiplier - Investments

Investment decisions on the P/E multiplier

Investment decisions can be made both at the level of individual companies and in comparable capital markets.

Value investment ( value style ) recommends for investment shares (companies) with a relatively low multiplier value P/E (by industry, market). The implied profitability of such companies is higher than the yield of peers. To understand this, we note that the P/E multiplier (another common notation in the literature - PE, P/e ) shows the payback period of the money invested in the company and is defined as the inverse of the discount rate. If the multiplier is equal to 5, then the discount rate required by investors for the company's own capital with non-accumulating cash benefits will be 20% per annum.

Multipliers allow you to understand how much investors in the market value 1 ruble more. revenue or profit of A company in comparison with 1 rub. revenue (profit) of company B or the average (reference) company. When calculating a financial indicator (for example, profit), you can consider both reported figures (for example, six months or one year) and predictable values.

Over the past 100 years, the American stock market in 80% of cases demonstrated the multiplier P/E in the range of 10 to 20. With a probability of 60%, it can be argued that the value of the multiplier "price-earnings" is in the range of 12-16. The average multiplier value in developed markets for a long time period is 14.5. Analysts and investors note that the multiplier's rise above the 25 mark was followed by a relatively rapid (within two to three years) return to the level no higher than 17. In developing markets, the multiplier values ​​are higher (at the level of 18-20). At higher averages, analysts speak of "overheating" market. For example, in the late 1990s. about & quot; overheat & quot; World market showed the values ​​of multipliers in the range of 30-40. For this same period, the dividend yield was high (multiplier "price-dividends"), which grew to 6-7%. Note that sectoral cyclicality and the growing demand for individual products and services can lead to significant industry differences in multipliers. In this regard, analysts often operate on average values ​​over long time intervals and industry adjustments.

Another method of identifying & quot; overheating & quot; - comparison of moving averages of the multiplier for two years and for five years. The analysis shows that in 91% of cases when the moving average of the multiplier P/E turned out to be below the moving average for five years in two years, the stock market fell significantly.

In the recommendations of successful professional investors for making decisions about entering into a company's equity, a recommendation is often made to calculate the "value investment ratio" (value invested ratio, VIR).


John Neff, a professional with more than 30 years of successful asset management experience in the US market, recommends companies with VIR not less than 0.5 for investment, and a relative value above the market average.


An important rule when applying the multiplier method: Before comparing companies by multiplier, you need to make sure that the calculation methods are the same (reporting or forecast indicators and the estimation horizon, the averaging method, etc.).

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