What does a negative P / E ratio mean?

P / E ratio, also known as share earnings ratio or PE ratio, is the ratio of the market price of a stock to its earnings per share (P / E ratio = current market price per share / after tax profit per share), and is an important indicator to measure the level of stock price and the profitability of enterprises. What does a negative P / E ratio mean?

The formula of P / E ratio is as follows: P / E = market price / earnings per share. When the listed company has a loss, the earnings per share is negative, and the price earnings ratio is negative. When the P / E ratio is negative, the P / E ratio index is distorted and can not be used as a reference index. In this case, other indicators such as P / B ratio (= market price per share / net asset per share) can be used as reference.
Looking at the P / E ratio index should be viewed from a dynamic perspective. For industries with high income volatility, it is normal to have losses in the short term. At this time, we should use the average profit as the P / E ratio, or use the expected future earnings to calculate the P / E ratio, so that the P / E ratio is meaningful.
Generally speaking, listed companies are relatively excellent companies. If the dynamic P / E ratio is negative, the situation is more complex. For example, when new projects are put into operation, the sales or production capacity are not going to go up, and at the same time, the depreciation of assets, management expenses and production costs increase greatly, resulting in operating losses, and the dynamic P / E ratio will be negative. This time requires careful analysis. If the P / E ratio continues to be negative, we should be very careful. Such companies have high risk. It is suggested to pay attention to the operating cash flow to see whether the company's operating cash flow can be maintained well (positive and positively correlated with the gross expected annualized interest rate).
In a stock, a negative P / E ratio is definitely not a good thing, because at this time the company is in a state of loss, resulting in a negative P / E ratio of the stock. It is suggested that they should be avoided because the quality of such companies is generally not very good, and they are easy to be treated by the CSRC as "ST" companies and "* ST" companies, or even be delisted.

Was this article helpful?

0 out of 0 found this helpful