In practical application, the current P/E ratio is usually divided by the compound growth rate of net profit in the next few years, not the compound growth rate of net profit in the past year or years. PEG index is also suitable for growth stocks with good fundamentals and rapid performance growth. Use pegging indicators for junk stocks and cyclical stocks. It's a little elusive.
Precautions for P/E ratio
Because different index compilation methods and constituent stocks are different and valuation standards are different, the P/E ratio of different indexes will be quite different, so it cannot be measured by the same index. For example, the P/E ratio of SSE 50 Index is 20, and that of GEM Index is 50. We can't say that the P/E ratio of SSE 50 is lower and more valuable for investment.
The constituent stocks of SSE 50 Index are the top 50 stocks in market value and liquidity of A shares, and they are the representatives of blue chips. Most of the GEM stocks are emerging industries such as TMT, and the index fluctuates greatly. The growth of GEM is very high, so the market will give a higher valuation than blue-chip stocks.