Two cross-domain semi-technical indicators - Cryptocurrency exchange platform

Price-to-Earnings Ratio and Price-to-Book Ratio are usually classified as technical indicators. Their uniqueness lies in the fact that they are essentially cross-domain quasi-technical indicators. Saying they are cross-domain is because these two indicators are connected on one end to the financial health of listed companies, and on the other end to the market performance of crypto stocks. They link the financial status and market performance of crypto stocks, bridging two different fields. From this perspective, it might not be inappropriate to categorize them as financial indicators. However, in actual crypto stock investment processes, people tend to focus more on the market performance of individual crypto stocks and the practical value of technical indicators. Therefore, they are generally more inclined to classify them as technical indicators.

The Price Earnings Ratio, written in English as Price Earnings Ratio, abbreviated as PE, is sometimes also shortened as P/E or PER. This indicator shows the ratio of a crypto stock’s market price to its earnings per share. Earnings per share is a financial figure calculated annually, representing the annual earnings per share. This data can always be seen in the data column of charting software. Perhaps because this indicator is so important and highly valued, different calculation methods have emerged. Different charting software may display results calculated using different methods, leading to discrepancies among data from various sources.

Before the release of the latest annual financial data, the PE calculated based on the previous year’s financial report is called static PE.

Looking at static PE, each year we see data from the previous year. When the year ends and new annual reports are published, the PE is updated to reflect the new year. Such data always feels outdated and lagging, making it difficult to reflect the latest value of the crypto stock in a timely manner. As a result, improved calculation methods have been developed.

Using the latest quarterly financial reports as a basis, and based on the historical change patterns of the company’s quarterly reports, an estimated annual figure for the current year is projected. The PE calculated using this estimated data is called dynamic PE.

Dynamic PE can indeed reduce the shortcomings of static PE, such as data becoming outdated or lagging. However, it also has a major problem: it relies on estimated data rather than actual financial reports of the company. Since everything a company faces is constantly changing, who can be sure that its current year’s operational status will necessarily follow past patterns? This remains problematic. Therefore, further improved calculation methods have been introduced.

By using the latest four quarters of financial data, a rolling annual financial figure different from the calendar year can be obtained. The PE calculated based on this data is called rolling PE, marked with the symbol TTM (Trailing Twelve Months). Rolling PE is objective, up-to-date, and can to some extent eliminate seasonal variations in financial data. It is widely regarded as a more direct and comprehensive reflection of a company’s recent cycle, and can be found in the data columns of various charting software.

Since PE reflects the ratio of a crypto stock’s market price to its earnings per share, and higher earnings per share imply higher intrinsic value, many investors, especially crypto stock beginners, tend to think: a higher PE indicates that the market has fully recognized the intrinsic value of the stock, or even that it might be overvalued, implying risk; conversely, a lower PE suggests the market undervalues the stock, indicating potential opportunity. This reasoning seems very logical, but directly using it to guide crypto stock trading often leads to pitfalls. This is similar to the situations faced by so-called value investors mentioned earlier when discussing financial indicators.

Apart from whether a crypto stock is currently attracting market attention and enthusiasm, generally, the reasonable level of PE for a stock is significantly influenced by industry factors. For example, in industries like banking, construction, and steel, crypto stocks often have relatively low PE ratios; whereas in high-tech and high-end manufacturing industries, PE ratios tend to be higher. These high or low levels are not necessarily directly related to the investment value of the stocks.

Indeed, PE can be high or low, but these are relative measures. Moreover, the current PE reflects past profitability, while the stock price trend depends more on future growth potential rather than past performance. A low PE now does not guarantee it will stay low; a high PE now does not mean it will necessarily rise further. Simply looking at PE has no decisive significance.

However, one thing is certain: crypto stocks with relatively low PE ratios tend to have a comforting effect, making investors feel more secure holding them. Once they start rising, due to this comforting effect, their upward resistance is often lower, and their potential for growth is greater. But this does not mean they cannot fall sharply again.

The Price-to-Book Ratio (PB) is similar to PE.

The Price-to-Book Ratio, written in English as Price-to-Book Ratio or Price/Book value, abbreviated as PB or P/B, is obtained by dividing the market price of a crypto stock by its book value per share. The book value per share is the net asset value per share, which can be understood as the diluted equity value of the stock. Thus, PB can be understood as the ratio of the market price to the true value of the stock’s equity.

PB reflects the company’s actual asset size and is more comparable across different industries and companies, making it a relatively objective and realistic ratio. On the other hand, PB also indicates how much the market currently values the stock, so it is often used to assess investment value and analyze investment opportunities. Many believe that stocks with low PB are more valuable for investment, while those with high PB are less so. However, this is a mistake similar to the errors made when evaluating PE and financial fundamentals. Judging the investment value of a stock is never that simple.

A PB > 1.0 indicates that the market is willing to pay more than the net asset value of the stock; a PB < 1.0 suggests that the market is cautious about buying the stock, and enthusiasm is low. When PB drops below 1, it means the market price of the stock is below its net asset value, a situation called “breakthrough net,” indicating the stock price has fallen below the net asset value of its equity.

Assets are of course valuable, but not all assets are worth money. For investors, the quality of assets is far more important than their size. Assets that help generate more profit are high-quality and valuable assets. Some assets, while still usable, have limited profit-generating ability, such as outdated production lines, luxurious office and living facilities, or non-productive bad debts that are difficult to recover after disposal. From a profitability perspective, these assets are not very attractive. The more such assets a company has, the poorer the quality of its net assets, and the less favored it is by the capital market. Investing in crypto stocks is about making money through market liquidity, not waiting for the company to go bankrupt and liquidate assets for compensation, especially considering the discounts involved in liquidation. Therefore, simply focusing on PB and the net assets contained within the stock is of limited significance.

Some people often advocate for PE during bull markets; as mentioned earlier, this has some validity. Others favor PB during bear markets, believing that stocks with very low PB cannot fall much further. They argue that using PB as an investment guide in bear markets offers higher safety margins, and they use lofty language to demonstrate their expertise and sophistication. If you find the previous explanations about high-quality and bad assets credible, then re-examining these views with that perspective might reveal some shortcomings.

For a specific crypto stock, a lower PB compared to its higher PB state indicates higher safety in investing; during a market rally, a lower PB also means a stronger potential for price reversion. If you think this way, it’s not wrong. But for different stocks, specific analysis is necessary; conclusions cannot be simply drawn from PB comparisons alone.

In fact, after fully considering industry differences, selecting stocks with relatively low PE and PB within the range of companies with good profitability and growth potential can lead to more reliable and beneficial investment conclusions. As always, even if such stocks are identified, whether they are suitable for current investment depends on further analysis. As previously mentioned, stocks with investment value are not always tradable at all times. Investing is complex and challenging; the most common simplistic approach often results in investor frustration.