The Research On Effectiveness Of PER In Investment Analysis And Decision

PER, as the ratio of stock price and current earnings, fully reflects the risk and returns.For its simple, intuitive and comparable characteristics, PER is regarded as an importantreference index to make value judgment, assess risk and evaluate earnings level forinvestors. Theoretically, the company with a lower PER is regarded to have a higherinvestment value, which usually means the company’s value has been underestimated.However, in today’s stock market, the company with a high PER can get more earnings,that’s called “high PER—high stock price” phenomenon. How to understand the economicmeanings of PER and the company growth meaning transferred by it, that is very importantto define the effectiveness of PER in investment analysis and decision.On basis of the effectiveness of market and the modal of DCFM, we studied the PERfrom the angles of industry life cycle and company growth. First, we built the theoreticalmodel of PER and analyzed the economic meaning of PER and how PER passed theinformation of company growth from the three aspects: growth opportunities, dividendsgrowth and residual income; second, on the basis of theoretical model and real experience,we analyzed the influence factors of PER from the macroscopic and microcosmic angles;third, we analyzed how to use PER in investment analysis and decision in reality. Wereached to the conclusions that, on the premise of efficient market, PER representscorporate growth and profitability, reflects the differences between current earnings andfuture profits, gives information about the current operation and development potential.On basis of theoretical analysis, we tested the effectiveness of PER in China A—Share Stock Market. The results indicated that the overall level of PER is relatively high inChina A—Share Stock Market, although PER had a distinct significant characteristics ofindustry, the lacks of Value-Investment concept still made it ineffective to reflect acompany’s growth and profitability. PER can just be a consultative target in today. Only byimproving supervision mechanism in stock market, establishing information disclosuresystem, setting up the value-investment concept, and setting up a more effective market,can PER be decisive.