Deciphering the PER Ratio: The Complete Guide to Analyzing Companies in the Stock Market

Fundamentals: What Does the PER Really Represent?

The PER is one of the most relevant indicators in fundamental analysis, allowing us to evaluate the relationship between a stock’s market value and the company’s periodic earnings. Its acronym stands for Price/Earnings Ratio, that is, Price/Earnings Ratio. This indicator reveals how many times a company’s market capitalization is supported by its annual earnings.

Let’s imagine a company with a PER of 15: it means that its current profits (projected over 12 months) would cover the company’s market value in 15 years. However, this simple interpretation hides a more complex reality, where the behavior of the PER varies significantly across sectors and economic cycles.

Among the six fundamental ratios to assess business health are: the PER, the EPS (or EPS in English), the P/VC, the EBITDA, the ROE, and the ROA. Each provides a different perspective on the viability of an investment.

The Dynamics of the PER in Practice: Cases That Illustrate Its Behavior

To understand how this metric works in the real world, it is instructive to examine different scenarios. Meta Platforms (formerly Facebook) exemplifies the ideal behavior: for years, as the stock rose, the PER systematically decreased. This reflected a company that consistently increased its profits. However, at the end of 2022, the situation changed radically. Despite the PER continuing to decrease, the stock price plummeted. The cause: market negative expectations about tech companies due to the FED’s interest rate hikes.

Another different pattern is observed in Boeing, where the PER remains relatively stable within defined ranges while the stock experiences fluctuations. In this case, the key difference lies in result volatility, particularly when results swing between positive and negative figures, fundamentally altering the interpretation of the indicator.

Methodology: How to Calculate a Company’s PER

There are two equivalent approaches to obtain this ratio. The first uses global figures:

PER = Market Capitalization / Net Profit

The second approach operates at the individual stock level:

PER = Price per Share / Earnings per Share (EPS)

Both formulas yield identical results. The required data are widely available on any financial platform, enabling any investor to perform these calculations independently.

Practical Example A

A company with a market capitalization of 2.6 billion dollars and net profits of 658 million would result in: PER = 3.95

Practical Example B

A stock trading at 2.78 dollars with an EPS of 0.09 dollars would yield: PER = 30.9

Locating the PER Ratio on Financial Platforms

PER information is easily found on any specialized financial publication, accompanied by data such as market capitalization, EPS, annual price range, and circulating shares. Depending on the jurisdiction, it may appear under the acronym PER (more common in Spain) or P/E (a common denomination in Anglo-Saxon markets).

Advanced Variants: Shiller PER and Normalized PER

Shiller PER: Extended Time Horizon

The fundamental difference between the conventional PER and its Shiller variant lies in the analysis timeframe. The traditional PER is based solely on the profits of the last fiscal year, which can be biased since results fluctuate significantly year to year.

The Shiller PER seeks greater representativeness by referencing the average profits of the last ten years, adjusted for inflation. The theory holds that this ten-year perspective reasonably projects profits for the next twenty years.

Normalized PER: A Deeper Approach

This variant goes beyond superficial analysis. Instead of using net profit, it incorporates free cash flow, providing a more faithful picture of the company’s true financial health. Liquid assets and financial debt are included in the calculation.

An illustrative example is the acquisition of Banco Popular by Santander for “one euro”: in reality, it involved assuming a colossal debt that completely transformed the actual valuation of the operation, something invisible in simplistic PER analysis.

Interpreting Values: What Do PER Levels Reveal

The interpretation of the PER depends on specific contexts, but generally it is distributed as follows:

However, these numbers alone are insufficient. A consistently low PER may indicate poor management nearing bankruptcy, while a high PER for a company with real growth prospects can be fully justified.

Sector Differentiation: Context Is Everything

A critical mistake is to compare PERs across sectors indiscriminately. Banks and industrial companies typically have low PERs, while tech and biotech firms reach extraordinary multiples.

ArcelorMittal, involved in metallurgy, maintains a PER of 2.58. In contrast, Zoom Video reaches 202.49. These differences are normal and expected, reflecting different growth dynamics, profit margins, and industry cycles. Trying to compare both companies solely using PER would be a flawed analysis.

The Relationship Between Value Investing and PER

Fund managers with a Value Investing approach extensively use this ratio. The Value strategy aims precisely for “good companies at a good price,” and the PER is a central tool. Funds like Horos Value Internacional show PERs of 7.24 versus 14.55 in their category, while Cobas Internacional maintains 5.46, both well below their peers, reflecting disciplined selection of undervalued stocks.

Complementarity with Other Metrics: PER Does Not Work Alone

It is essential to combine PER with other indicators to build a solid analysis. An investment based solely on PER will inevitably fail. Complementary metrics include Price/Book Value, ROE, ROA, and RoTE. Additionally, it is crucial to analyze the composition of profits: do they come from operational business or from one-off asset sales?

A rigorous fundamental analysis requires a minimum depth in key business figures, avoiding confusing operational earnings with extraordinary income.

Strengths of Using PER in Investment Decisions

• Easy to obtain and calculate, accessible even for novice investors
• Efficient tool for quick comparisons within the same sector
• Widely consulted indicator by investment professionals
• Allows comparison of companies regardless of dividend policies

Limitations and Pitfalls of PER

• Only captures profits from one fiscal year, projecting into the future without sufficient data
• Inapplicable to companies with negative or zero profits
• Reflects a static state, not the dynamic condition of the company
• Especially problematic in cyclical sectors, where low PER at cyclical peaks and high PER at cyclical lows invert the interpretative logic

Conclusions on the Strategic Use of PER

The PER is an essential but incomplete tool of fundamental analysis. Its maximum usefulness arises when comparing companies within the same sector under similar market conditions. An investment strategy based solely on this indicator is destined to fail.

The reality is that many companies on the brink of insolvency have low PERs precisely because of a lack of investor confidence. Therefore, spend at least ten minutes delving into the company’s operational and financial aspects, combine PER with other key market indicators, and thus build a well-founded, informed, and potentially profitable investment project.