As far as I understand, the only thing that investor really get from the company’s profit is mainly from dividends. So, all other P/E ratios, fundamental analysis, chart analysis, etc for stock price growth are no better than just looking into a fortune-teller’s crystal ball? Stock prices seems to be almost entirely driven by “market forces” aka what people feel about the company. Whatever those “expert” analysts say seems to be just trying to put meaning into something that really doesn’t actually impact the stock price, not much difference from horoscope? There are many big profitable companies with almost flat stock prices and there are also companies without any real profits but the stock prices skyrockets.
In: Economics
Shares tend to trade at a ratio of profits called P/E ratio (price/earnings). Market average is about 15, but that varies based on company industry, growth prospects, etc. So as profits grow, a company’s share price would grow assuming stable P/E for that company. A slow growth or declining industry (utilities) will see lower P/E than a high growth sector or company (Tesla). It’s as much about predictions of future as it is past results, so a company losing money today that is projected to hit profitability and large growth in the future will trade at higher P/E than hugely profitable but stable company.
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