PER: The metric that can never be missing in your investment analysis

When trying to determine if a stock is expensive or cheap, there is an indicator that most investors consult first: the PER. This metric is so fundamental in company analysis that it is part of the six essential ratios (along with EPS, P/VC, EBITDA, ROE, and ROA) that every analyst must master.

What does the PER really reveal?

The PER (Price/Earnings Ratio) is the relationship between a company’s market price and its periodic earnings. In other words, it indicates how many years of current profits you would need to recover the company’s total market value.

Imagine a company with a PER of 15: it means that its one-year earnings, multiplied by 15, equal its market capitalization. A low PER suggests that the company is undervalued (potential buy), while a high PER may indicate overvaluation or very positive growth expectations.

What’s interesting is that the PER does not behave linearly. Consider Meta Platforms: between 2020 and late 2022, while the PER was gradually decreasing, the stock price was rising. This reflected a reality: the company was generating increasingly higher profits. However, from late 2022 onward, the pattern broke. The PER continued to fall, but the price plummeted. The reason? The Federal Reserve’s interest rate hikes caused tech stocks to lose appeal, regardless of their fundamentals.

The simple calculation you can do in seconds

Calculating the PER is extraordinarily simple. You have two options:

Option 1 - Using total figures: PER = Market Capitalization ÷ Net Profit

Option 2 - Using per-share data: PER = Share Price ÷ Earnings Per Share (EPS)

Both formulas yield the same result. Let’s look at two practical examples:

Company A: Market cap of $2.6 billion, net profits of $658 million. Its PER = 3.95 (very low, potentially undervalued).

Company B: Share price $2.78, EPS of $0.09. Its PER = 30.9 (high, with higher growth expectations already priced in).

Beyond the conventional PER: variants you should know

Although the standard PER is practical, some analysts prefer alternatives they consider more realistic:

Shiller PER: Instead of using one year’s earnings, it takes the average of the last 10 years adjusted for inflation. The idea is that 10 years of historical data can help forecast earnings for the next 20 years. It avoids distortions caused by short-term economic cycles.

Normalized PER: Adjusts the formula to reflect true financial health. It takes market cap, subtracts liquid assets, adds debt, and divides by Free Cash Flow instead of net profit. This method would have revealed the true situation of Banco Popular before its €1 purchase (an operation involving assuming billions in debt).

Interpretation varies depending on context

There is no “magic PER” applicable to all companies. Conventional interpretation tables suggest:

• 0-10: Low, but beware: it may indicate real problems
• 10-17: “Healthy” range preferred by analysts
• 17-25: Signal of accelerated growth or a bubble forming
• Over 25: Very high future profitability expectations… or pure speculation

But sector context is critical. Arcelor Mittal (steel) trades with a PER of 2.58 because the steel industry typically has low margins. Zoom Video, on the other hand, reached a PER of 202.49 during the remote work boom because markets projected exponential growth.

Comparing a bank with a tech company using only the PER is a mistake. You should compare “apples with apples” and companies within the same sector and geography.

How Value investors exploit the PER

The Value investing community (those seeking “good companies at a good price”) uses the PER as a cornerstone. Funds like Horos Value Internacional operate with a PER of 7.24 compared to 14.55 in their category, prioritizing undervalued companies. Cobas Internacional maintains a PER of 5.46, confirming that the Value strategy critically depends on this indicator.

What NOT to do with the PER

The PER has severe limitations that many investors forget:

• Imperfect for cyclical companies: A car manufacturer with a low PER at the peak of the cycle can have a very high PER during a downturn. Data is “frozen” at a specific moment.

• Useless without profits: Startups that are not profitable have an undefined PER. You cannot compare.

• A snapshot, not a movie: It reflects current reality, not the company’s future. Many companies with a “good PER” went bankrupt because of disastrous management.

• Needs context: Combining the PER with other metrics is mandatory. Analyze EPS, ROE (Return on Equity), ROA (Return on Assets), Price/Book, and capital structure. A high profit may come from a one-time sale of an asset, not the core business.

The verdict: PER is a tool, not an oracle

The PER is practically accessible, easy to calculate, and excellent for quick comparisons between companies in the same sector. That’s why professional investors consult it constantly.

But an investment based solely on PER will fail. Companies in bankruptcy have low PER precisely because no one trusts them.

The key: spend at least 10 minutes deepening your understanding of the company’s fundamentals. Review management quality, business model solidity, competitive position, and growth projections. Combine the PER with other ratios and build a solid analysis. This way, you can identify real opportunities instead of falling into value traps.