The limitations of price-earnings ratio

 Price-earnings ratio refers to a study period (usually 12 months), the stock price and earnings per share ratio. According to investigation into price-earnings ratio of the different The study period is generally the last 12 months or the previous year's earnings per share, earnings per share is generally known that; with this relative price-earnings ratio is dynamic, the dynamic price-earnings ratio of the study period is generally the next 12 months or next year's earnings per share, the earnings per share is unknown, investors predict.
earnings as a direct valuation method has many advantages, through the industry average price-earnings ratio price-earnings ratio of the comparison and the company comparison, to discover whether the industry or the stock is overvalued, whether the investment value. But there are earnings limitations of their own. to purchase a stock is expected to purchase, the purchase of shares or the company's future, but is the current stock price divided by the known gains of the past, there will be meaningful? static price-earnings ratio does not reflect the limitations of the future.
great uncertainty, there is not expected to realized the risk that the stock price according to this analysis will be at risk. expected inaccuracy is dynamic usage limitations.
In addition, the price-earnings ratio as well One limitation is reflected in the difference of a single company. like DNA and fingerprints of each person is different, each company's management, business strategy, product structure, market share, capital structure is different, that the world there can be no operational risk on the same company. so it can not be blind to say that the valuation of 20 times price-earnings ratio below 30 times earnings for the valuation of time in the same industry, the lower the valuation of corporate price-earnings ratio is also seen was lower than the companies with high price-earnings ratio.
Although there is limited price-earnings ratio, but intuitively it is the stock price and earnings per share reflects the relationship, it is still to some extent reflect the stock's valuation and risk, but definitely not the only condition.