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Johannesburg Stock Exchange All Share PE ratio as at end January 2019
Date: 11 February 2019 Category: Stock Market |
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We take a look at the latest numbers published by the Johannesburg Stock Exchange (JSE) and calculate the PE ratio over the All share (or the overall PE ratio of all shares listed on the JSE).
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JSE All Share PE ratio over time
Ever wondered what the PE ratio of the overall market in South Africa is? We hear PE ratio's of individual companies being quoted all to often.In fact far to often is the PE ratio being used as the basis of valuation a stock. But thats a discussion for another day. So below the PE ratio of the JSE All share index as at the end of each month since the start of January 2007. This is useful when one wants to compare a particular stock/share's PE ratio to that of the market at large, in order to identify if there is potential value in investing in particular company.
So based on the data above the current PE ratio of the overall market is sitting at just below 17. What that implies is that based on the company profits being earned by all shares listed on the JSE, it will take 17 years (assuming they earn the same profit every year) for the profits earned to equal the price paid for the shares. So if you buy a company at R17 a share, and their profit made for the year was R1 a share, they are trading at a PE ratio of 17 and it will take 17 years of R1 profit per share to equal the R17 that was paid for the share.
While PE ratios are handy, we urge investors and potential investors to look a lot deeper into companies before investing. There might be a reason why a company's PE ratio is low. The market might not expect strong earnings in future, which means a low PE now with lower earnings in future means a higher PE ratio. A high PE ratio is also not the best indicator of future earnings and profits. Companies might have acquired lots of assets during a year which affected their bottom line but the acquired assets will help with future profit generation.
We suggest investors look at the business case of companies, including their balance sheet, debt levels, cash generation capacity, whether they have a unique product that is hard to replicate, barriers to entry into the markets they operate in, high barriers to entry is a sign of less competition in future as the market is hard to penetrate and probably costly to get into.
While PE ratios are handy, we urge investors and potential investors to look a lot deeper into companies before investing. There might be a reason why a company's PE ratio is low. The market might not expect strong earnings in future, which means a low PE now with lower earnings in future means a higher PE ratio. A high PE ratio is also not the best indicator of future earnings and profits. Companies might have acquired lots of assets during a year which affected their bottom line but the acquired assets will help with future profit generation.
We suggest investors look at the business case of companies, including their balance sheet, debt levels, cash generation capacity, whether they have a unique product that is hard to replicate, barriers to entry into the markets they operate in, high barriers to entry is a sign of less competition in future as the market is hard to penetrate and probably costly to get into.