What Does Price-to-Earnings Ratio (PE) Mean? Master It to Navigate the Chinese Stock Market

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Suppose you spend 1 million to buy a store that nets 100,000 profit each year—how many years to break even? The answer is 10 years. This “10” is the core stock market indicator we’re discussing today—the price-to-earnings ratio (PE).

It acts like an “investment payback calculator” 🧮, helping you measure theoretically how many years it takes to recover costs.

In the persistently hot Chinese market, new individual investors on the Shanghai Stock Exchange reached 2.37 million households in November 2025 alone. In such a massive market, mastering a simple valuation tool is crucial.

For example, the recent PE ratio of an important Chinese stock market index is shown in the table below, intuitively reflecting current market valuation levels.

Understanding this number gives you a simple and effective compass for investment decisions.

Key Takeaways

• The price-to-earnings ratio (PE) is a tool to measure investment payback time, helping you judge whether a stock or market is expensive or cheap.
• Trailing PE (PE-TTM) is the most reliable, using the company’s actual profits from the last year.
• You can judge the overall valuation of Chinese stock market indices by comparing current PE with historical data.
• PE is not the only criterion; combining it with the PEG indicator better evaluates growth companies.
• Do not overly rely on a single PE indicator; comprehensive analysis combining industry characteristics and company situations is needed.

Basics of Price-to-Earnings Ratio (PE)

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We already know PE is an “investment payback calculator,” but this calculator has several modes. To use it well, you first need to understand its core algorithm and different types.

Core Calculation Formula for PE

The PE calculation logic is very intuitive. Remembering this core formula is enough:
Price-to-Earnings Ratio (PE) = Company Market Cap / Company Net Profit = Stock Price / Earnings Per Share (EPS)

The key here is understanding Earnings Per Share (EPS). You can think of it as how much profit each share you hold earned in the past year. It is calculated as the company’s total net profit divided by total shares outstanding.

Simply put, if Company A’s stock price is 20 yuan and EPS is 2 yuan, its PE is 10 times. This means theoretically you need 10 years to recover the cost of buying this stock.

Differences Between Static, Dynamic, and Trailing PE

On trading software, you often see “PE (Static),” “PE (Dynamic),” and “PE (TTM).” Their core difference lies in the net profit data used to calculate “earnings per share.”

• Static PE 🧠 It uses the company’s previous full fiscal year net profit. This is like looking at a student’s final exam scores from last year—data is certain but may not reflect recent progress or regression.
• Dynamic PE 📈 It uses broker or institutional forecasts for the company’s next year’s net profit. This is like predicting a student’s exam scores this year—forward-looking, but predictions are just predictions and may be inaccurate.
• Trailing PE (PE-TTM) ⚖️ TTM stands for “Trailing Twelve Months”, meaning “past twelve months.” It uses the sum of the company’s most recent four quarters net profit. This data reflects the latest operating conditions and is entirely based on actual occurred performance. Therefore, trailing PE is currently the most mainstream and commonly used reference indicator.

For clearer understanding, here is a simple comparison:

Now, you have mastered the basics of PE. Next time you see these three PE values, you’ll know which one to focus on.

How to Use PE to Evaluate Chinese Stock Market Indices?

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You have learned how to interpret a company’s PE ratio. Now, let’s broaden the view—from evaluating one “tree” to judging the temperature of the entire “forest.” This “forest” is Chinese stock market indices like the Shanghai Composite Index.

Valuing the entire market sounds complex, but the core tool remains the familiar PE ratio.

Meaning of Index PE Ratio

Index PE ratio, simply put, is the “total market cap” of all constituent stocks in the index divided by their “total net profit.”

You can think of it as overall valuation for a basket of stocks. For example, the Shanghai Composite Index PE represents the overall valuation level of the most representative companies listed on the Shanghai Stock Exchange. It reflects how much investors are willing to pay for one yuan of net profit from these companies.

Core View: Index PE is a thermometer measuring whether the overall market is “expensive” or “cheap.” When index PE is low, it means relatively high investment value for the entire market; conversely, it means potential bubbles and higher risks.

Evaluation Method One: Historical Longitudinal Comparison

This is the most intuitive evaluation method. Its logic is very simple: compare with past self.

You need to find a Chinese stock market index (taking Shanghai Composite as example) average PE over a long period, such as 5 years, 10 years, or longer. Then, compare the current PE with this historical average.

• If current PE < historical average PE: Indicates current market valuation below historical average, relatively cheap.
• If current PE > historical average PE: Indicates current market valuation above historical average, relatively expensive.

For example, suppose the Shanghai Composite’s 10-year average PE is 15 times. If now it’s only 12 times, from a historical perspective, the market is in a relatively inexpensive range.

Evaluation Method Two: PE Percentile Method

Historical longitudinal comparison is simple but not precise enough. The PE percentile method is its advanced version and currently a more scientific and commonly used approach.

PE Percentile refers to the position of the current PE in historical data.

For example: If the current Shanghai Composite PE percentile is 20%, it means that over a long past period (e.g., 10 years), PE was higher than now 80% of the time, and lower or equal only 20% of the time.

This indicator clearly tells you how “extreme” the current valuation is in historical context. It provides very clear investment reference signals.

You can refer to the following common judgment standards:

So, how to query these key data?

It’s actually very simple. You don’t need to calculate yourself. Mainstream securities apps or financial websites provide ready tools.

Practical Guide: Three Steps to Check Index PE Percentile

1. Open your securities app (e.g., East Money, Tonghuashun, etc.).
2. Search for “Shanghai Composite Index” (code 000001) and enter its details page.
3. Look for the tab named “Valuation Analysis” or “Data”; you can usually see the current trailing PE (PE-TTM) and its percentile in nearly 10 years of historical data at a glance.

Through these two methods, you can clearly judge the overall position of a Chinese stock market index, providing a macro “navigation map” for your investment decisions.

Limitations of PE Valuation

You now master the technique of using PE to judge market temperature, but remember, no indicator is omnipotent. The PE “payback calculator” can also fail. Understanding its limitations helps avoid many investment pitfalls.

Core Warning: Over-relying on a single PE indicator is dangerous. It only tells part of the story; in-depth research reveals the full picture.

Blind Spots in PE Indicator Application

In certain scenarios, PE loses reference value or even misleads. Be especially vigilant in the following cases:

1. Loss-Making Companies If a company is losing money, its net profit is negative. Dividing positive stock price by negative EPS yields a negative PE. This negative number has no practical meaning. Therefore, when a company is unprofitable, financial software usually displays PE as “N/A” or omits it.
2. Highly Cyclical Industries Industries like steel, coal, and chemicals have profits that fluctuate wildly with economic cycles. At peak prosperity, profits surge, making PE extremely low and seemingly “cheap.” But this is often the most dangerous market moment. Conversely, in troughs, thin or negative profits make PE extremely high, but this may actually be an investment opportunity.
3. Cross-Industry Comparisons You cannot simply compare a bank stock’s PE with a semiconductor company’s PE. Business models and growth expectations differ vastly across industries. For example, high-growth tech industries may average 60 times PE, while mature steel industries average only 14 times. Cross-industry PE comparison is like pitting fish against birds in a race—meaningless.

Comprehensive Analysis Combining PEG Indicator

So, for a company with very high PE (e.g., 50 times), does it mean it’s too expensive? Not necessarily. If its growth is strong enough, high PE may be reasonable.

To address this, investing master Peter Lynch proposed an advanced indicator—PEG. It adds the company’s “profit growth rate” on top of PE.

The calculation formula is very simple:
PEG = Price-to-Earnings Ratio (PE) / Net Profit Growth Rate (%)

The essence of PEG is that it helps judge whether the current PE matches the company’s growth.

For example: Company A has PE of 30 times, forecasted net profit growth of 30%, so PEG is 1. Company B also has PE of 30 times, but growth forecast only 15%, so PEG is 2. Clearly, Company A is more attractive.

By introducing PEG, you can evaluate a company more three-dimensionally, especially a powerful supplementary tool when analyzing growth companies.

Remember one sentence: The price-to-earnings ratio (PE) is your “investment payback calculator.”

For Chinese stock market indices like the Shanghai Composite, by checking its PE position in historical context, you can quickly judge overall market valuation levels.

Expert views also remind us to view comprehensively. For example, Allianz Global Investors once pointed out that sometimes seemingly high PE may be due to companies in cyclical troughs, while other indicators may already show market attractiveness.

This provides an important reference coordinate for your buy or sell decisions. Now open your securities software, personally check the current index PE percentile, and take your first step in valuation practice.

FAQ

Which PE should I look at? Static, Dynamic, or Trailing?

You should prioritize trailing PE (PE-TTM) ⚖️.

It uses real profits from the most recent four quarters, with fresh and objective data. Static PE has lagged information, while dynamic PE relies on potentially inaccurate forecasts, so trailing PE is a more reliable reference.

Does lower PE always mean better investment value?

Not necessarily. Low PE can sometimes be a “value trap.”

For example, in highly cyclical industries at prosperity peaks, surging profits make PE extremely low, but this is often a signal of impending stock price declines. You need comprehensive judgment combining industry prospects and company fundamentals, not just PE levels.

Why is the ChiNext Index PE always much higher than the Shanghai Composite Index?

Because their constituent stocks are completely different.

The ChiNext Index mainly consists of high-growth tech and innovative companies. The market expects them to earn more in the future, so willing to give higher valuations. This embodies the characteristic of high growth corresponding to high PE.