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We take a look at the latest JSE All Share Index PE ratio as calculated based on data released by the operator of the stock market, the JSE. The PE ratio of the All Share index declined sharply compared to the previous month largely driven by the fears around the spread of the Coronavirus and the impact it will have on global growth.
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All Share PE ratio over time up to end February 2020
Before we take a look at the JSE All Share PE ratio over time and the levels it is currently at, perhaps its best to explain exactly what the PE ratio measures and what it tells one about the valuation of a company and or the markets overall. In short the abbreviation PE stands for Price to Earnings.
So a PE ratio is the price over the earnings. So lets say company X is listed and its shares are trading at R100 a share. Same company X reported in their last set of results that their earnings came in at R10 a share.
This the PE ratio is R100/R10 = 10.
So its the value of the shares divided by the profits made by the company (or more broadly total value of all shares divided by total profits of all shares on the market). But now we have a PE ratio of 10. What does that tell us? What does it mean? Assuming company X will make R10 a share every year to infinity, the PE ratio of 10 tells you that in 10 years time, the company would have made in profits per share, what you are paying for the share price now. Or looked at differently R100 paid per share over PE of 10 gives you a earnings yield of 10%. Lets take an example that doesnt include so many 10's.
Company B makes a profit of R5.95 a share (and its share price is trading at R100 a share). The PE ratio would be R100/R5.95= 16.81. Thus the PE ratio of company B is 16.81. So assuming it makes R5.95 in profits each year, one would have to wait 16.81 years before profits made over 16.81 years equals what you are paying for the shares now, alternatively that's a earnings yield of 5.95% (R100 a share/ PE of 16.81 = 5.95)
So now that we know how to interpret a PE ratio, lets take a look at the monthly PE ratio's for the JSE All Share Index as well as a 13 month moving average which is indicative of a longer term PE ratio for the market as a whole.
So a PE ratio is the price over the earnings. So lets say company X is listed and its shares are trading at R100 a share. Same company X reported in their last set of results that their earnings came in at R10 a share.
This the PE ratio is R100/R10 = 10.
So its the value of the shares divided by the profits made by the company (or more broadly total value of all shares divided by total profits of all shares on the market). But now we have a PE ratio of 10. What does that tell us? What does it mean? Assuming company X will make R10 a share every year to infinity, the PE ratio of 10 tells you that in 10 years time, the company would have made in profits per share, what you are paying for the share price now. Or looked at differently R100 paid per share over PE of 10 gives you a earnings yield of 10%. Lets take an example that doesnt include so many 10's.
Company B makes a profit of R5.95 a share (and its share price is trading at R100 a share). The PE ratio would be R100/R5.95= 16.81. Thus the PE ratio of company B is 16.81. So assuming it makes R5.95 in profits each year, one would have to wait 16.81 years before profits made over 16.81 years equals what you are paying for the shares now, alternatively that's a earnings yield of 5.95% (R100 a share/ PE of 16.81 = 5.95)
So now that we know how to interpret a PE ratio, lets take a look at the monthly PE ratio's for the JSE All Share Index as well as a 13 month moving average which is indicative of a longer term PE ratio for the market as a whole.
So since January 2011, the JSE All Share average PE ratio is sitting at 17.66. As at the end of February 2020, the JSE All Share PE ratio was sitting at 14.62 (so well below above the average levels since the start of 2011). And the longer term PE ratio as measured by the 13 month moving average (which has been in constant decline for some time now), came in at 16.68, which is above the current PE ratio of the market as a whole.
So what does it tell us about the markets and its valuation? Well market valuations have certainly come down strongly since late 2016 when the market PE ratio was around the 23 mark. Since then company profits and earnings have been disappointing sending share prices tumbling down and dragging down PE ratios with them. The month of February 2020 was a particularly brutal months for the markets, with Coronavirus fears spreading across world financial markets and which saw the JSE All Share Index lose more than 10% of its value so far in 2020, and the last trading day of February seeing a decline of almost 5% in the JSE All Share Index.
It is handy to know what the overall market PE ratio currently is, what it's longer term trend and average value is. Especially when looking at the valuations and PE ratios of individual shares listed on the JSE one can compare individual company PE ratios and see how they compare to the overall market average PE. But PE ratios is one of a multitude of numbers one should look at before determining whether the markets or a particular share is expensive or not.
But in the current volatile trading environment fundamentals of companies and countries doesn't mean much as fear leads to panic selling which pushes down financial markets quickly and significantly and the rebuilding phase always takes longer. When the bears hit, they hit hard and fast.
So what does it tell us about the markets and its valuation? Well market valuations have certainly come down strongly since late 2016 when the market PE ratio was around the 23 mark. Since then company profits and earnings have been disappointing sending share prices tumbling down and dragging down PE ratios with them. The month of February 2020 was a particularly brutal months for the markets, with Coronavirus fears spreading across world financial markets and which saw the JSE All Share Index lose more than 10% of its value so far in 2020, and the last trading day of February seeing a decline of almost 5% in the JSE All Share Index.
It is handy to know what the overall market PE ratio currently is, what it's longer term trend and average value is. Especially when looking at the valuations and PE ratios of individual shares listed on the JSE one can compare individual company PE ratios and see how they compare to the overall market average PE. But PE ratios is one of a multitude of numbers one should look at before determining whether the markets or a particular share is expensive or not.
But in the current volatile trading environment fundamentals of companies and countries doesn't mean much as fear leads to panic selling which pushes down financial markets quickly and significantly and the rebuilding phase always takes longer. When the bears hit, they hit hard and fast.