Understanding the PER: The metric every investor must master

What is PER and why does it matter in the stock market?

PER is one of the most relevant indicators in fundamental analysis. Its initials stand for Price/Earnings Ratio. In Spanish, Ratio Precio/Beneficio. Essentially, this metric shows us how many times the market value of a company is represented by its annual earnings.

In other words: if a company has a PER of 15, it means that its current profits (projected over 12 months) would pay for the company’s total price in 15 years. That is, we are seeing how much the market is willing to pay for each euro of profit the company generates.

Fundamental analysis recognizes six essential ratios to evaluate corporate health. PER tops this list, accompanied by EPS (Earnings Per Share), the P/VC, EBITDA, ROE, and ROA. However, PER stands out because it allows us not only to compare companies but also to track how corporate profits evolve over time.

How PER works in real practice

Theory is nice, but let’s see how it behaves in real markets. Let’s take the case of Meta Platforms (formerly Facebook). A few years ago, its pattern was predictable: as PER gradually decreased, the stock price constantly rose. Why? The company was generating more and more profits, justifying the rise in its share price.

However, since late 2022, this pattern broke. Despite PER continuing to decrease (indicating increasing profits), the stock collapsed. Why? Because the Federal Reserve started raising interest rates, which caused the market to revalue tech stocks upward, regardless of their profits.

Another revealing example is Boeing. In this case, PER remains oscillating within consistent ranges, and the stock moves up or down in direct correlation with those fluctuations. The interesting part here is that the sign of PER (positive or negative) makes crucial differences in interpreting stock behavior.

These examples demonstrate that PER is not an isolated predictor. The macroeconomic context, sector growth expectations, and market sentiment play decisive roles.

How to calculate PER: two formulas, same result

There are two approaches to calculating this metric, and both yield equivalent results:

Approach 1 (Global magnitudes): Market capitalization ÷ Total net profit

Approach 2 (Per share level): Stock price ÷ Earnings per share (EPS)

The beauty of PER lies in its simplicity. The necessary data are publicly accessible and easy to obtain, allowing any investor to perform these calculations on their own without technological dependencies.

Where to find PER

Any decent financial platform includes PER along with other indicators. It usually appears under the initials “PER” on Spanish websites or under “P/E” on Anglo-Saxon platforms. Alongside it, you will find market capitalization, EPS, the 52-week range, and total shares outstanding.

For example, platforms like Infobolsa display all these data structured for Spanish stocks, while Yahoo! Finance adopts the P/E format for international securities.

Practical calculation examples

Case A: Imagine a company with a market capitalization of 2,600 million dollars and net profits of 658 million dollars. Its PER would be: 2,600 ÷ 658 = 3.95

This is a very low PER, typical of mature companies or those in traditional sectors.

Case B: A company where each share costs 2.78 dollars and earnings per share are 0.09 dollars. Calculation: 2.78 ÷ 0.09 = 30.9

Here we see a much higher PER, more common in growth or tech companies.

Variants of PER: Shiller and normalized

There is no single way to interpret this metric. The industry has developed variants to address specific limitations.

Shiller PER

A common criticism of traditional PER is that it only considers profits from one fiscal year, a too-short time horizon. Results can be volatile year after year, distorting the company’s true picture.

The Shiller PER addresses this limitation by extending the time frame. Instead of one year, it uses the average profits of the last 10 years, adjusted for inflation. The theory suggests that this decade-long approach reasonably projects profits for the next 20 years.

Formula: Market capitalization ÷ Average profits over 10 years (inflation-adjusted)

Normalized PER

This variant emphasizes the company’s financial health more than the analysis period. It is calculated as:

(Market capitalization - Liquid assets + Financial debt) ÷ Free Cash Flow

This calculation “cleans” the numbers much more, separating the essentials from the noise. An emblematic case: when Santander acquired Banco Popular for 1 euro, it actually assumed a multi-billion debt that caused competitors like Bankia and BBVA to withdraw. The normalized PER would have better captured this complexity than the standard metric.

Interpreting ranges: from 0 to infinity

The interpretation of PER varies according to its range:

• 0-10: Low PER, attractive at first glance, but a warning sign: profits could fall soon
• 10-17: The “golden” zone for analysts, indicating balanced growth without distorted expectations
• 17-25: Ambiguous territory: may reflect real growth or bubble formation
• Over 25: Extremely volatile in interpretation: may mean extraordinary projections or overvaluation

Here comes the crucial warning: if investment success depended solely on PER, analysts would do only one thing: look for low PER and buy. But reality is more complex.

The trap of low PER: when low does NOT mean good

Many companies trade with low PER because they are bankrupt, poorly managed, or near collapse. The market does not trust their future profits, so it values their shares at a bargain price.

Financial history is full of cases where companies with seemingly attractive PER ended up bankrupt. That’s why, PER should never be the sole investment criterion.

PER by sector: comparing apples to apples

A serious mistake is comparing the PER of companies from different sectors. Banks and steel companies traditionally trade with low PER (ArcelorMittal: 2.58), while tech and biotech firms show very high PERs.

Zoom Video, for example, reached a PER of 202.49 during its pandemic boom. Overvalued? Not necessarily, considering its growth prospects. Was the same criterion applicable to ArcelorMittal? Absolutely not.

The golden rule: always compare companies within the same sector, geography, and market context so that the metrics are meaningful.

PER as a valuation comparison tool

Investors practicing Value Investing (looking for good companies at a fair price) heavily use PER. Funds like Horos Value Internacional FI maintain a PER of 7.24 compared to 14.56 in its category, demonstrating the strategy of selecting undervalued assets.

Similarly, Cobas Internacional FI shows a PER of 5.46, confirming that systematic search for low PER is central to this investment philosophy.

Combining PER with other metrics

Here’s the secret many novice investors ignore: PER is useless without context.

Alongside PER, always consider:

• EPS (Earnings Per Share): confirms profit quality
• Price/Book Value (P/VC): evaluates shares vs. equity
• ROE and ROA: returns on invested capital
• RoTE: return on tangible equity

Additionally, a thorough analysis requires studying income composition, operating margins, net debt, and expense structure. Profits might be high simply because the company sold a financial asset, not because its core business improved.

Undisputed advantages of PER

• Accessible: simple calculation without sophisticated tools
• Quick comparison: allows evaluating companies in the same sector in seconds
• Widely used: analysts and institutional investors use it as a standard reference
• Inclusive: works even with companies that do not pay dividends

Limitations you should know

• Static data: reflects a moment, not dynamically future prospects
• Business cycles: in cyclical companies, PER is high in downturns and low in booms, confusing analysis
• Companies without profits: not applicable to startups or bankrupt firms
• Short-term information: projects one year ahead, too narrow for strategic investments

Conclusion: PER in its proper measure

PER is a fundamental tool, but not absolute. Its greatest usefulness lies in quick sector comparisons within similar geographic contexts. Never invest solely based on a low PER.

Remember: many near-bankrupt companies have low PER because no one trusts them. A winning strategy combines PER with in-depth company analysis, dedicating at least an hour to understand their financial core. That way, you will build a solid and potentially profitable portfolio, not a collection of value traps.