Musings on PE ratios with focus on German Market

First things first…

In the dividend discount model, a stock’s price is affected by dividend per share, cost of equity, and EPS growth rate:

Data analysis and feature selection

PE ratios across industry suggest that the coronavirus crisis has left both winners and losers in its wake. From the graph below, the biggest winner is understandably department stores as they are essential businesses and are largely unaffected by the pandemic.

Average PE ratios by industry
Pairplots of various financial key metrics

Regression result

Regression result

The way forward

One might notice that industries at the short end of the stick such as airlines and apparel retails do not show up in the model. One reason for absence may well be that they have a negative earnings this quarter and as a result do not have a meaning P/E ratio. Another reason might be lack of data. Thus, other measures such as EV to EBITDA, EV to FCFF, Price to FCFE (Free Cash Flow to Equity) should be used flexibly in addition to PE in order to accurately take stock of a company’s equity.

Bonus

Getting data is very difficult these days, as a Bloomberg Terminal is not readily available at the comfort of your own house while schools are closed for an unforeseeable future. In case you are interested in analyzing the dataset and making a conclusion to yourself, please have a look at my data here:

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