|
JSE PE ratio up to end of July 2018
Date: 8 Aug 2018 Category: Stock Market |
Related Topics |
|
We take a look at the latest data published by the JSE and focus on the monthly PE ratio of the JSE All Share Index over time. And find that the JSE All Share is currently trading at levels well above its long term average.
We therefore caution investors who are expecting stellar returns from shares listed on the JSE, that the returns might not meet their expectations in the short term, as purely based on PE ratios, the overall market looks expensive. |
|
JSE All Share PE ratio over time
The line chart below shows the monthly PE ratio of the JSE All Share Index over time, as well as the average JSE All Share PE ratio from the start of 2010.
So basically the graph is showing that for the last 3 years, the JSE All Share has traded above it's longer term average of 17.68
This is an indication of just how expensive the overall market currently is, largely driven by Naspers (NPN) which carries a weight of almost 20% in the JSE All Share. See our JSE All Share Pie chart for more. For those who are unsure of what exactly a PE ratio shows or represents. One way to look at it is to say that for a PE of 20, an investor will have to wait 20 years for a firm to make in profits per share, what the investor currently pays for the share. Thus the higher the PE ratio, the longer the investor has to wait to make back in profits from a firm compare to what he paid for the share. And the reverse is true, the lower the PE ratio of a firm or the All Share the quicker a company will make in profits per share what the investor paid for it.
So if an investor buys a share at R100 each and the company makes R10 profits per share, the PE ratio is 10. R100 profit divided by R10 profits per share. Thus if a the company keeps making R10 per share per year, it will take 10 years for the company to make in profits per share what the investor paid for it.
Sure there are various different reasons as to why shares, or the overall All Share PE ratio is high or low. A few of them are mentioned below:
Low PE ratio:
High PE ratio:
This is an indication of just how expensive the overall market currently is, largely driven by Naspers (NPN) which carries a weight of almost 20% in the JSE All Share. See our JSE All Share Pie chart for more. For those who are unsure of what exactly a PE ratio shows or represents. One way to look at it is to say that for a PE of 20, an investor will have to wait 20 years for a firm to make in profits per share, what the investor currently pays for the share. Thus the higher the PE ratio, the longer the investor has to wait to make back in profits from a firm compare to what he paid for the share. And the reverse is true, the lower the PE ratio of a firm or the All Share the quicker a company will make in profits per share what the investor paid for it.
So if an investor buys a share at R100 each and the company makes R10 profits per share, the PE ratio is 10. R100 profit divided by R10 profits per share. Thus if a the company keeps making R10 per share per year, it will take 10 years for the company to make in profits per share what the investor paid for it.
Sure there are various different reasons as to why shares, or the overall All Share PE ratio is high or low. A few of them are mentioned below:
Low PE ratio:
- Poor earnings and the share price is punished which could push the PE ratio lower
- Investors are not expecting strong earnings from a company or sector thus the PE is relatively subdued,
High PE ratio:
- Investors expect strong profit growth in the near to medium term (think Capitec that traded as large PE ratios, but this was justified as they showed strong profit growth for many years in a row due to massive increases in client numbers)
- Very poor earnings or low earnings, which could push the PE ratio up (if the share price is not punished)
So back the JSE monthly PE ratio. The current JSE All Share PE ratio 19.69, puts the JSE All Share currently, at 11.4% above the long term average of the market. So to those expecting great returns from the JSE All Share, their JSE unit trusts, or individual shares, just remember the overall market is 11.4% more expensive than the long term average