PER: The compass every investor needs (but almost nobody knows how to use correctly)

Why do two companies with similar profits trade at completely different prices? How do analysts know if a stock is expensive or cheap? The answer lies in a metric that appears on almost all financial platforms: the PER (Price/Earnings Ratio). But here’s the trick: calculating the PER is easy; interpreting it correctly is where most people go wrong.

What is the PER really, and why should it matter to you?

The PER is the ratio between a stock’s market price and the profit it generates periodically. The initials come from Price/Earnings Ratio. In practice, this indicator tells you how many years of profits a company needs to “pay for itself” at its current price.

If a company has a PER of 15, it means that its annual profits would need 15 years to match its total market capitalization.

Although there are multiple ratios to analyze companies (EPS, P/VC, EBITDA, ROE, ROA), the PER is irreplaceable when you want to quickly compare whether you’re looking at a bargain or a trap. And most importantly: it works even for companies that do not pay dividends, something not all metrics can do.

The two ways to calculate the PER (and why it’s so simple)

There are two equivalent approaches. You can work with overall figures or with per-share data:

Method 1 (Company level): PER = Market capitalization ÷ Net profit

Method 2 (Per share level): PER = Share price ÷ EPS (Earnings per share)

The good thing is that both give you the same result, and the necessary data is available on any financial platform. You don’t need to be an accountant to do this calculation.

Where to find the PER and how it’s presented

On any serious financial website (Yahoo Finance, Infobolsa, TradingView), the PER appears alongside other indicators like market cap, 52-week range, and number of shares outstanding.

In US and UK markets, you’ll see it as P/E, while in Spanish platforms they use PER. The data is identical; only the terminology differs.

Two practical examples to understand it

Case A: A company is worth $2.6 billion and earned $658 million this year.
PER = 2,600 ÷ 658 = 3.95

Case B: A stock costs $2.78 and earnings per share are $0.09.
PER = 2.78 ÷ 0.09 = 30.9

See the difference? The first is cheap, the second is expensive. But don’t jump to conclusions: “expensive” doesn’t always mean “bad.”

The interpretation guide (although it’s not as simple as it seems)

There’s a classic table circulating in investment books:

Here’s the problem: this table is useful but incomplete. Meta (Facebook) taught us well. Years ago, its PER consistently decreased while the stock price rose, indicating increasing profits year after year. Then, at the end of 2022, everything changed: the PER kept falling but the stock plummeted. Why? The Fed raised interest rates, penalizing tech stocks regardless of how cheap they seemed based on PER.

Lesson: PER doesn’t work in isolation. It’s a compass, not a complete map.

PER vs. Shiller PER: which one to trust?

The Shiller PER is a variant that tries to solve a fundamental problem of the traditional PER: it only looks at one year of profits.

The problem? One year is too short. Profits fluctuate. A company can have a bad year or an exceptional one without that reflecting its long-term reality.

The Shiller PER averages profits over the last 10 years, adjusted for inflation. The idea is that with this broader perspective, you can better predict the next 20 years of earnings.

But even Shiller isn’t immune to critics. Some analysts argue that looking back 10 years is like driving forward while looking in the rearview mirror.

The normalized PER: when you need to look beyond

There’s another, more sophisticated variant: the normalized PER, which adjusts the calculation to better reflect actual financial health.

Instead of using net profit, it uses Free Cash Flow. And instead of just market capitalization, it subtracts liquid assets and adds financial debt. This metric “peels the onion” and shows you only the essentials.

The classic example: when Banco Santander bought Banco Popular for €1 in 2017, many thought it was a bargain. In reality, it took on massive debt that other banks (like Bankia and BBVA) didn’t want to touch. The conventional PER would have been misleading; the normalized PER would have shown the real story.

Is a low PER always a good investment?

Here’s the real art of investing. A low PER is seductive, but it may be evidence that the market already knows something you don’t.

Look at Arcelor Mittal (steel industry) with a PER of 2.58. It’s cheap. But why? Because the sector is cyclical and mature, with few surprises in growth. Now compare it with Zoom Video, which reached a PER of 202.49 during the pandemic. It’s very expensive, but reflects expectations of exponential growth.

Comparing Arcelor Mittal with Zoom using only PER is like comparing apples and oranges. Tech and biotech sectors naturally have higher PERs than mature sectors like banking or industry.

The advantages you can’t ignore

• Simple: Getting the data and calculating takes less than a minute
• Comparative: Works perfectly for measuring companies within the same sector
• Universal: Works even for companies without dividends
• Respected: No serious analyst ignores PER; it’s part of basic fundamental analysis

The traps to avoid

• Look only at one year: Profits can be an anomaly
• Doesn’t work in losses: If a company isn’t profitable, PER is irrelevant
• Static: It tells you nothing about future management quality
• A disaster in cyclical industries: A mining or banking company will have a low PER in good cycles and very high in bad cycles

Why Value investors love it (but Growth investors ignore it)

In the world of Value Investing, the goal is “finding good companies at a fair price.” PER is the preferred tool here. Funds like Horos Value Internacional (PER of 7.24 vs. sector average 14.55) or Cobas Internacional (PER of 5.46) build portfolios seeking that combination of quality and discount.

Growth investors, on the other hand, are willing to pay any price today if they believe future growth will justify it.

Combine PER with other metrics or fail

Here’s the key: never invest based solely on PER. Combine it with:

• EPS: to understand earnings trajectory
• ROE and ROA: to measure company efficiency
• Price/Book Value: to see if there are underlying assets
• Free Cash Flow: to ensure profits are real, not just accounting entries

Also, spend time studying the composition of profits. A company might have high profits, but if they come from selling an asset once (not from core business), don’t expect them to recur.

The conclusion you probably don’t want to hear

The PER is an extraordinary but incomplete tool. It’s especially useful when comparing companies within the same sector and geography, under similar market conditions.

But investing solely based on a low PER is a recipe for failure. The history is full of companies with low PERs that went bankrupt because of disastrous management. The market kept them cheap for a reason: people didn’t trust them.

The winning formula: Low PER + strong sector + competent management + visible growth + deep fundamental analysis. It’s no guarantee of success, but it’s infinitely better than just looking at a number.

Spend at least 10 minutes researching the inner workings of any company before deciding. That small effort can mean the difference between a smart investment and a financial disaster.