I wrote an article before the festival to explain the relationship between PB, PE and ROE.
PB=PE*ROE
When ROE returns to an upward trend, PE will increase (when PE is underestimated).
The rise of PE and ROE together will lead to a greater increase in PB.
Therefore, when the stock market reaches the bottom area, the key to judging when it will rise is to judge the future trend of ROE.
Note that this is a trend, not an inflection point. Judging the inflection point can only be left to the gods.
When we are sure that ROE will increase in the future, it will be sooner or later!
Even if the process of rising is very tortuous and turbulent, I can still hold shares steadily and patiently.
Today we will take a look at the changes in the future ROE of A shares.
First look at the cycle of ROE changes!
1. Once every three years, just like my aunt
We all know that a bull-bear cycle in the stock market is about 3 to 3 and a half years. In fact, the change of ROE is similar to that of the stock market bulls and bears.
Even ROE is more punctual than the cycle of the stock market, because the stock market is also affected by many uncertain factors, and the most difficult thing to control is the mood of the masses. See below
When I wrote that article before, some readers argued that we could not judge the inflection point.
This is nonsense, who can judge the inflection point? We only need to judge the general trend, and the rest is to wait patiently.
It can be seen from the figure that from last year to now, the overall valuation of the stock market is definitely not high. Compared with ROE, it is definitely underestimated, and the room for decline is limited.
And ROE has been consolidating downward for a long time. It depends on when the head turns upwards.
Next, disassemble the ROE and it will be clear at a glance.
2. Disassembly of ROE
Let’s use DuPont analysis to dismantle ROE.
DuPont analysis is not difficult. ROE=net profit/net assets=(net profit/total revenue)*(total revenue/total assets)*(total assets/net assets)=sales net profit rate*total asset turnover*equity multiplier
The so-called equity multiplier, simply put, is to see how much leverage is added.
We only need to look at the future trends of the three variables, in fact, it is very easy to judge the direction of ROE changes.
3. Profitability is likely to increase
What are the factors related to the net profit margin of sales?
In fact, there are two things: gross profit margin and three fees
Look at the gross profit margin first.
As product prices rise and costs fall, gross profit margins will rise.
Let’s see the trend of CPI and PPI.
Compared with last year, the PPI must be lower, so the cost of enterprises will definitely be lower this year.
As for prices, the CPI is likely to rise this year. The reason is very simple, the demand must be higher than last year, you can see the housing prices of various tourist attractions during the New Year period.
After the epidemic, the biggest constraint, is eliminated, there is no reason for demand to be lower than in 2022! Please note that what is mentioned here is compared with 2022. The current stock market will be bright with a little sunshine. We don’t need to compare with before the epidemic.
Therefore, judging from the general trend, the gross profit margin of enterprises will increase this year.
In addition, the gross profit margin is also related to the technological change and concentration improvement of the enterprise.
Technological changes will not change much in the short term, but the degree of concentration can change greatly after three years of the epidemic.
The reason is simple, small fish can’t last three years, big fish have sufficient cash flow, when others are in distress, they can just harvest them, grab their market share, and even buy them outright.
In short, from the perspective of CPI, PPI and concentration, the gross profit margin will increase .
Look at the three fees again . Nothing more than selling, administrative and financial expenses.
From 2021 to 2022, most companies are reducing costs and increasing efficiency , and from the perspective of Internet companies, the effect is very obvious.
The so-called cost reduction and efficiency increase is to cut unnecessary expenses. If you look carefully, you can find that after each economic recession, the efficiency of the surviving enterprises will increase.
Then during the economic boom, they will suffer from the “big business disease”, and the efficiency will decrease again. So the cycle repeats!
If you can’t think from the enterprise side, you can look at how many people were laid off and how many people were cut last year. These are all cost reductions. So don’t be tight when you see layoffs. For investment, this is not necessarily a bad thing.
Buffett often intervenes in the operation of enterprises, laying off everything that should be cut and reducing the cost that should be reduced. You can ask yourself, how many people in your unit are standing in the latrine and not shitting? Once they see that the company has laid off employees, these people will immediately behave very positively.
As for finance charges, it’s even simpler. In an environment of loose currency and fiscal loosening, financial costs will definitely be reduced.
In short, there is a high probability that the profitability of listed companies will increase this year.
4. There is a high probability that the operational capacity will be improved
There are two key factors related to total asset turnover. Either the sales revenue will increase, or the total assets will decrease.
Will sales revenue increase? I think it’s impossible to be worse than 2022 if you think about it with your toes?
Let’s just talk about consumption. Is it possible that She Zero can be lower than last year?
If you don’t believe me, then go out and walk around more, to feel the current crowd, don’t stay at home all day long.
This year’s sales revenue growth is mostly due to the increase in volume and price, that is, both price and sales volume will increase!
As for total assets, it is mainly related to production capacity. When production capacity expands rapidly, total assets increase rapidly.
How many companies dare to greatly expand production capacity now? Last year, many companies were reducing idle production capacity. Enterprises generally expand their production capacity substantially during the boom period.
By the way, this year is the starting point of a new Jugra cycle . The Jugra cycle is closely related to capital expansion.
We are very lucky now, and we are at the starting point where the inventory cycle and the Jugra cycle resonate upward.
In addition, another way to reduce total assets is for companies to repurchase stocks. Anyway, last year was the peak period for companies to repurchase shares. This is also very helpful to improve ROE!
If you still can’t understand the above, just think about it. In 2023, will there be more garbage thrown away at home than last year, and will restaurants dump more hogwash every day than last year?
If it is more than last year, it means that you have a high probability of buying more. Then the company sells more, and the circulation of goods will speed up. The natural asset turnover rate will increase.
5. There is a high probability that companies will increase leverage
Whether a company will increase leverage mainly depends on the company’s operating conditions.
Assuming that the net profit margin is 15% and the interest rate is only 3%, then in the process of economic recovery, more leverage can be obtained to obtain more profits.
Enterprises are reluctant to borrow mainly because they cannot see the future economic situation clearly, so they dare not borrow easily.
As long as demand picks up, these companies will naturally have the confidence to borrow after their inventories decrease.
In fact, medium and long-term loans to enterprises have continued to improve. This is a very good sign.
This shows that in 2023, companies will increase leverage to a certain extent, which will drive ROE to increase.
In addition, the reduction of net assets and dividends will also increase leverage.
Because stock repurchases can reduce net worth. As for the dividend, we have to wait for the announcement of the listed company this year.
6. Summary
To judge the overall trend of the stock market, the first is to look at the valuation, and the second is to look at the change direction of ROE.
Valuation provides a margin of safety, ROE increases, valuation will increase, and profits will also increase, which will bring Davis double-click.
In 2022, there is a high probability that the valuation has bottomed out, and there is a high probability that the direction of change in ROE will gradually increase.
The reason is simple, neither the sales margin, the turnover rate nor the equity multiplier are likely to be lower than last year.
As the saying goes, when things get bad, they have to be reversed!
Not only the entire stock market, we are selecting individual stocks, and their long-term future trends are also closely related to ROE. There are two types of stocks that we need to buy the most:
First, the valuation is reasonable or underestimated, and ROE can continue to increase in the future;
Second, the valuation is reasonable or underestimated, and the ROE can be maintained at a high level for a long time, such as greater than 20%.
Of course, there are extremely high requirements for our insight into the industry and the company. How to analyze ROE specifically, in fact, after dismantling it, carefully find out what are the main factors to improve ROE?
The reward is voluntary, and every penny is a silent support, haha!
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