PER: The fundamental indicator every investor must master

When it comes to assessing whether a listed company offers a good investment opportunity, there is one indicator that virtually no analyst fails to consult: the PER or Price/Earnings ratio. This metric has become one of the most consulted tools in fundamental analysis, although its correct interpretation requires understanding much more than its simple mathematical calculation.

Why PER is Key in Your Investment Decision

The PER is the relationship between a stock’s market price and the company’s periodically generated earnings. Its full English name, Price/Earnings Ratio, hints at its function: measuring how many times the annual profit is reflected in the company’s market valuation.

Imagine a company with a PER of 15. This means that, maintaining current profits constant, it would take 15 years of earnings to pay off the company’s total market value. This concept is fundamental because it allows us to compare whether the market is paying a fair, high, or depressed price for each unit of profit generated.

PER is part of the six essential ratios for analyzing corporate health, along with EPS (Earnings Per Share), P/BV (Price/Book Value), EBITDA, ROE (Return on Equity), and ROA (Return on Assets).

How PER Works in Different Market Contexts

Recent market history offers clear lessons on PER behavior. Take the case of Meta Platforms (Facebook). For years, the company showed a trend where PER steadily decreased while the stock price rose. Why? The company was generating increasing profits, which reduced the ratio while the market rewarded growth with higher prices.

However, from late 2022 onwards, this pattern broke. Despite PER ratios continuing to decline, the stock fell significantly. What happened? Expectations for tech stocks changed when the Federal Reserve raised interest rates.

Another illustrative case is Boeing. In this company, PER remains within relatively stable ranges, oscillating between positive and negative values. When the result is positive, the stock tends to respond accordingly. The significant point here is that the sign of the result (profits or losses) has a decisive influence on the price movement.

These examples demonstrate that PER alone does not explain all market behavior, although it provides valuable information when combined with other contextual factors.

Formulas to Calculate PER

PER calculation can be done in two equivalent ways, both providing the same result:

First formula (global data): Market Capitalization ÷ Total Net Profit = PER

Second formula (per share data): Share Price ÷ Earnings Per Share (EPS) = PER

Both methods are accessible because the required information is publicly available. The choice simply depends on whether you work with total magnitudes or unit data per share.

Practical Calculation Examples

Case 1: A company has a market capitalization of $2,600 million and net profits of $658 million. PER = 2,600 ÷ 658 = 3.95

Case 2: A stock trades at $2.78 with EPS of $0.09. PER = 2.78 ÷ 0.09 = 30.9

These very different results (3.95 vs 30.9) illustrate how different companies can have very disparate valuations depending on their growth and profitability profiles.

Where to Find PER and How It Is Presented

Locating PER is extremely simple. Any financial portal includes this ratio along with other data such as market capitalization, EPS, 52-week highs and lows, and number of shares outstanding.

Depending on the information source, you will find this metric under the abbreviation PER (especially on Spanish and international platforms) or under P/E (more common on U.S. and UK portals like Yahoo! Finance).

Interpretation: What PER Really Means

PER interpretation depends on the range in which it falls:

PER between 0 and 10: Reflects a company that the market values conservatively. Although it may seem attractive, it could also indicate that investors expect profits to decline in upcoming periods.

PER between 10 and 17: This is the range that analysts consider optimal. It allows for medium-term growth anticipation without compromising profitability expectations.

PER between 17 and 25: May indicate that the company has experienced significant growth since the last earnings report, or that we are approaching a possible overvaluation.

PER above 25: Here, two opposing interpretations converge. On one hand, it may reflect very positive projections for the company. On the other, it could be evidence of a speculative bubble.

PER by Sector: The Importance of Comparing Like with Like

One of the most common limitations in analysis is comparing PERs across different sectors. A company’s PER only makes sense when compared to other companies in the same sector under similar market conditions.

Industrial and financial sectors historically maintain low PERs. ArcelorMittal, involved in steelmaking, has a PER of 2.58. In contrast, technology companies operate with substantially higher ratios. Zoom Video, popularized during the pandemic, reaches a PER of 202.49.

This radical difference is due to the markets’ vastly different growth expectations for each sector. Comparing the PER of a bank with that of a biotech company would be as absurd as comparing apples and oranges.

Shiller PER and Normalized PER: Sophisticated Variants

There are variations of the standard PER designed to provide more refined readings of company value.

The Shiller PER aims to correct the inherent volatility of annual profits. Instead of taking profits from a single year, it uses the average of the last 10 years adjusted for inflation. The premise is that observing a decade provides a more representative picture of profit-generating capacity, allowing projections for the next 20 years.

The normalized PER incorporates a more comprehensive analysis of financial health. It takes market capitalization, subtracts liquid assets, adds financial debt, and divides the result by Free Cash Flow (cash flow from operations) instead of net profit. This approach is especially useful in complex transactions. For example, when Banco Santander acquired Banco Popular for a nominal “1 euro,” the assumption of associated debt completely transformed the financial equation, something the conventional PER did not adequately capture.

Strengths and Limitations of PER as a Tool

Advantages of Using PER

• Accessibility: Easy for any investor to obtain and calculate
• Comparative Power: Allows quick comparison between companies in the same sector
• Universal Standard: Remains one of the three most consulted indicators by professionals
• Universal Applicability: Works even for companies that do not pay dividends

Limitations That Cannot Be Ignored

• Short-term horizon: Only considers profits of one period to project the future
• Inapplicable in loss-making companies: Cannot be calculated if no profits are generated
• Static, not dynamic: Provides a snapshot, not a view of future trajectory
• Problems with cyclical companies: These will show artificially low PER at the peak of the economic cycle and artificially high during downturns

The Role of PER in Value Investing

In the universe of Value Investing, where the goal is “finding good companies at a good price,” PER is practically indispensable. Funds specializing in this philosophy actively seek companies with low ratios indicating undervaluation.

Funds like Horos Value Internacional typically operate with PERs of 7.249, significantly below the 14.559 of their reference category. Similar results are seen with Cobas Internacional FI, with a PER of 5.466 versus the category average. This consistent pursuit of lower ratios is the practical expression of the Value philosophy.

Combining with Other Metrics: Towards a Holistic Analysis

Investing should never be based solely on PER. The history is full of companies that appeared attractive based on ratios but headed toward bankruptcy.

A serious analysis requires combining PER with multiple complementary indicators: EPS, P/BV, ROE, ROA, RoTE (Return on Tangible Equity), and a detailed study of income composition. It is essential to investigate whether profits come from core business or from one-off sales of financial assets.

Conclusions: Using PER Wisely

PER is undoubtedly a fundamental instrument in investment analysis. Its greatest utility lies in enabling direct comparisons between competing companies within the same sector and geography, under similar market conditions.

However, making it the sole decision criterion would be a costly mistake. Many companies show low PER precisely because the market has lost confidence in them, not because they represent opportunities.

The correct approach is to use PER as part of an integrated strategy. Spend enough time understanding the company’s internal dynamics, combine this indicator with other relevant metrics, and build investment projects that balance opportunity and fundamental solidity. Only then will you turn numbers into profitable decisions.