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Price/Earnings: amazing interpretation #2In my previous post , we started to analyze the most popular financial ratio in the world – Price / Earnings or P/E (particularly one of the options for interpreting it). I said that P/E can be defined as the amount of money that must be paid once in order to receive 1 monetary unit of diluted net income per year. For American companies, it will be in US dollars, for Indian companies it will be in rupees, etc. In this post, I would like to analyze another interpretation of this financial ratio, which will allow you to look at P/E differently. To do this, let's look at the formula for calculating P/E again: P/E = Capitalization / Diluted earnings Now let's add some refinements to the formula: P/E = Current capitalization / Diluted earnings for the last year (*) (*) In my case, by year I mean the last 12 months. Next, let's see what the Current capitalization and Diluted earnings for the last year are expressed in, for example, in an American company: - Current capitalization is in $; - Diluted earnings for the last year are in $/year. As a result, we can write the following formula: P/E = Current capitalization / Diluted earnings for the last year = $ / $ / year = N years (*) (*) According to the basic rules of math, $ will be reduced by $, and we will be left with only the number of years. It's very unusual, isn't it? It turns out that P/E can also be the number of years! Yes, indeed, we can say that P/E is the number of years that a shareholder (investor) will need to wait in order to recoup their investments at the current price from the earnings flow, provided that the level of profit does not change . Of course, the condition of an unchangeable level of profit is very unrealistic. It is rare to find a company that shows the same profit from year to year. Nevertheless, we have nothing more real than the current capitalization of the company and its latest profit. Everything else is just predictions and probable estimates. It is also important to understand that during the purchase of shares, the investor fixates one of the P/E components - the price (P). Therefore, they only need to keep an eye on the earnings (E) and calculate their own P/E without paying attention to the current capitalization. If the level of earnings increases since the purchase of shares, the investor's personal P/E will decrease, and, consequently, the number of years to wait for recoupment. Another thing is when the earnings level, on the contrary, decreases – then an investor will face an increase in their P/E level and, consequently, an increase in the payback period of their own investments. In this case, of course, you have to think about the prospects of such an investment. You can also argue that not all 100% of earnings are spent paying dividends, and therefore you can’t use the level of earnings to calculate the payback period of an investment. Yes, indeed: it is rare for a company to give all of its earnings to dividends. However, the lack of a proper dividend level is not a reason to change anything in the formula or this interpretation at all, because retained earnings are the main fundamental driver of a company's capitalization growth. And whatever the investor misses out on in terms of dividends, they can get it in the form of an increase in the value of the shares they bought. Now, let's discuss how to interpret the obtained P/E value. Intuitively, the lower it is, the better. For example, if an investor bought shares at P/E = 100, it means that they will have to wait 100 years for their investment to pay off. That seems like a risky investment, doesn't it? Of course, one can hope for future earnings growth and, consequently, for a decrease in their personal P/E value. But what if it doesn’t happen? Let me give you an example. For instance, you have bought a country house, and so now you have to get to work via country roads. You have an inexpensive off-road vehicle to do this task. It does its job well and takes you to work via a road that has nothing but potholes. Thus, you get the necessary positive effect this inexpensive thing provides. However, later you learn that they will build a high-speed highway in place of the rural road. And that is exactly what you have dreamed of! After hearing the news, you buy a Ferrari. Now, you will be able to get to work in 5 minutes instead of 30 minutes (and in such a nice car!) However, you have to leave your new sports car in the yard to wait until the road is built. A month later, the news came out that, due to the structure of the road, the highway would be built in a completely different location. A year later your off-road vehicle breaks down. Oh well, now you have to get into your Ferrari and swerve around the potholes. It is not hard to guess what is going to happen to your expensive car after a while. This way, your high expectations for the future road project turned out to be a disaster for your investment in the expensive car. It works the same way with stock investments. If you only consider the company's future earnings forecast, you run the risk of being left alone with just the forecast instead of the earnings. Thus, P/E can serve as a measure of your risk. The higher the P/E value at the time you buy a stock, the more risk you take. But what is the acceptable level of P/E ? Oddly enough, I think the answer to this question depends on your age. When you are just beginning your journey, life gives you an absolutely priceless resource, known as time. You can try, take risks, make mistakes, and then try again. That's what children do as they explore the world around them. Or when young people try out different jobs to find exactly what they like. You can use your time in the stock market in the same manner - by looking at companies with a P/E that suits your age. The younger you are, the higher P/E level you can afford when selecting companies. Conversely, in my opinion, the older you are, the lower P/E level you can afford. To put it simply, you just don’t have as much time to wait for a return on your investment. So, my point is, the stock market perception of a 20-year-old investor should differ from the perception of a 50-year-old investor. If the former can afford to invest with a high payback period, it may be too risky for the latter. Now let's try to translate this reasoning into a specific algorithm. First, let's see how many companies we are able to find in different P/E ranges. As an example, let's take the companies that are traded on the NYSE (April 2023). As you can see from the table, the larger the P/E range, the more companies we can consider. The investor's task comes down to figuring out what P/E range is relevant to them in their current age. To do this, we need data on life expectancy in different countries. As an example, let's take the World Bank Group's 2020 data for several countries: Japan, India, China, Russia, Germany, Spain, the United States, and Brazil. To understand which range of P/E values to choose, you need to subtract your current age from your life expectancy: Life Expectancy - Your Current Age I recommend focusing on the country where you expect to live most of your life. Thus, for a 25-year-old male from the United States, the difference would be: 74,50 - 25 = 49,50 Which corresponds with a P/E range of 0 to 50. For a 60-year-old woman from Japan, the difference would be: 87,74 - 60 = 27,74 Which corresponds with a P/E range of 0 to 30. For a 70-year-old man from Russia, the difference would be: 66,49 - 70 = -3,51 In the case of a negative difference, the P/E range of 0 to 10 should be used. It doesn’t matter which country's stocks you invest in if you expect to live most of your life in Japan, Russia, or the United States. P/E indicates time, and time flows the same for any company and for you. So, this algorithm will allow you to easily calculate your acceptable range of P/E values. However, I want to caution you against making investment decisions based on this ratio alone. A low P/E value does not guarantee that you are free of risks . For example, sometimes the P/E level can drop significantly due to a decline in P (capitalization) because of extraordinary events, whose impact can only be seen in a future income statement (where we would learn the actual value of E - earnings). Nevertheless, the P/E value is a good indicator of the payback period of your investment, which answers the question: when should you consider buying a company's stock? When the P/E value is in an acceptable range of values for you. But the P/E level doesn’t tell you what company to consider and what price to take. I will tell you about this in the next posts. See you soon!
NASDAQ:AMZNEducation
by Be_Capy
2
ABC/DAMAN is struggling to reach EL level and stick there. EL is 98. AMZN needs to convincingly get past this and there are still not guarantees with this wacky economy. Price is sitting on a support level that is not super strong. The more touches the stronger it becomes. This support level is made up of some resistance levels that could now sere as support. Possible stop below C. No recommendation. T1 was met Vision without action is a daydream. Action without vision can be a nightmare.
NASDAQ:AMZN
by lauralea
2
AMZN - From A to Z Analysis ✈️Hello TradingView Family / Fellow Traders. This is Richard, also known as theSignalyst. As per my last analysis (attached on the chart), we were looking for buy setups short-term as AMZN was sitting around a strong support. AMZN rejected the 80.0 support and traded higher. However, we are still overall bearish trading inside the falling channel in blue. 🏹 For the bulls to take over long-term, we need a break above the upper blue trendline and blue zone 110.0 📉 Meanwhile, the bears can still push lower for a higher low . In this case, as we approach the 80.0 again we will be looking for new short-term buy setups. Which scenario do you think will happen first? and why? 📚 Always follow your trading plan regarding entry, risk management, and trade management. Good luck! All Strategies Are Good; If Managed Properly! ~Rich
NASDAQ:AMZNLong
by TheSignalyst
5
AMZN - inverted Head & ShouldersAMZN went through a complex Wckyoff Distribution that began from Sep2020, lasting more than a year before succumbing to the bear market of 2022. Finally in Dec 2022 it dipped into a long term support area (80-84) and began to find support. The recovery since then has been choppy and an inverted head and shoulders (bottoming) formation began to take shape in this process. Last Friday, AMZN finally broke above the neckline (zone 104-105.50) to close 106.96. Could this be another "false" breakup as it had happened earlier on 2nd Feb this year? We will not know for sure however the odds have improved with the formation of an inverted H&S formation (a bullish reversal pattern with good odds of success, though nothing is 100%). With earnings expected on the 27th Apr, there is some risk taking a position now. However any dip going forward might find support around 95-06 region and could be opportunity to accumulate. Let's see what happens after earnings! Disclaimer: Just my 2 cents and not a trade advice. Kindly do your own due diligence and trade according to your own risk tolerance and don't forget that money management is important! "Let winners run and cut losses short". Take care and Good Luck!
NASDAQ:AMZNLong
by Juliac
3