What factors influence the price-earnings ratio?

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It is not uncommon for profits to collapse that are not due to bad decisions on the part of the company. Therefore, investors should take a closer look and find out what causes a negative value. Stock market events consist of possible chains of events that have an impact on prices as well as on corporate balance sheets. 

A price increase at trade-exness.com/swap in a particular sector, such as the real estate market, can unsettle investors and cause prices to fall. The company's economic performance can also stagnate and lead to higher PE ratio figures. In such cases, external influencing factors are the cause of negative values, which, however, do not represent a poor core business of the company. As soon as the price situation stabilises, the value determined for the price-earnings ratio will also decrease again. Shareholders should assess the overall situation and try to identify the factors that are responsible for supposedly negative figures. 

Price changes in the sector

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Investors can take advantage of these phases and use them to invest in order to profit from a short-term crisis. Star investor Warren Buffett used these reasons to invest in companies that had a low share price, including low profits, and were shunned by investors. But Buffet, as a value investor, understood the core business and was convinced. Time has proved him right and the companies have developed into economically strong firms. 

Political events or natural disasters can also affect numerical values. The art is interpretation and anticipation, which is crucial for success on the stock market. Investors who are able to anticipate even before certain values are visible in the charter have a time advantage over other investors. Anticipation is about recognising trends that are not yet part of stock market activity. The PE Ratio can be helpful in this respect to find fluctuation values and the like. 

  •     Political events
  •     Natural events


Finally, there is the possibility that a company does not have a viable core business or is mismanaged. A continuously rising PE ratio value can indicate a collapse in profits. In such cases, a company is no longer competitive and is losing customers. If it is due to these reasons, investors should not invest their money in these companies.

But the exception proves the rule: mismanagement can also be present if the value is positive even though the company is experiencing a drop in profits. This is when shareholders want to sell their shares cheaply, as a result of a negative trend. If the selling price is low, a seemingly positive value can arise in the calculation of the price-earnings ratio. Investors should therefore interpret ratios in the right context. 

  •     Profit slumps
  •     Earnings growth