PER: The indicator every investor must master to make accurate decisions

When faced with selecting companies to invest in, most analysts agree that there is a set of fundamental ratios that cannot be missing. Among them, the PER stands out as one of the most consulted, along with EPS. But do we really know what this ratio tells us and how to interpret it correctly? The difference between a deep analysis and a costly mistake often lies in thoroughly understanding this metric.

Why the PER is your stock market ally

The PER (Price/Earnings Ratio, or Price/Earnings Ratio) measures a fundamental relationship: how many times the company’s annual profit represents its market capitalization. In other words, it indicates how many years the current profits (projected over 12 months) would take to “pay off” the company’s total stock market value.

Let’s imagine a company with a PER of 15. This means that its current earnings would need 15 years to match the current stock price. Does that make sense? It depends on the context, as we will see later.

What’s interesting is that the PER not only serves as an instant comparative tool but also allows us to observe a company’s growth trajectory over time. When you see the PER decreasing while the stock price rises, you are witnessing what all investors seek: a company that generates increasingly higher profits without its valuation skyrocketing disproportionately.

Calculating the PER: two paths, one result

The beauty of the PER lies in its simple calculation. You have two options:

First option: Divide the total market capitalization by the company’s net profit.

Second option: Divide the individual share price by the earnings per share (EPS).

Both formulas lead to the same destination. The data is accessible to anyone: found on financial platforms, quarterly reports, and professional analyses.

Practical Example A

A company with a market cap of 2.6 billion dollars generates net profits of 658 million. Its PER = 2,600 ÷ 658 = 3.95

Practical Example B

A stock trades at $2.78 with an EPS of $0.09. Its PER = 2.78 ÷ 0.09 = 30.9

Notice how in the second case the ratio is significantly higher. This does not automatically mean it’s a worse option; it depends on the sector and the phase of the business cycle.

Where to find the PER: quick access to information

On any serious financial platform, you will find the PER along with other essential data: market capitalization, EPS, 52-week price range, number of shares outstanding. In Spanish publications, it will appear under the name “PER,” while on North American and British platforms, you will see it as “P/E” (both acronyms are interchangeable).

Interpreting the PER: context is everything

Traditional manuals suggest interpretation ranges, but reality is more nuanced:

• Between 0 and 10: A low PER seems attractive at first glance, but may be a sign of future problems. Earnings expectations could contract.
• Between 10 and 17: The comfort zone for many analysts, balancing reasonable growth with moderate expectations.
• Between 17 and 25: Ambiguous territory. It could indicate recent growth or the beginning of a speculative bubble.
• Above 25: Double signal. Extreme optimism about future projections, or dangerous overvaluation.

But here’s the key: these ranges are not immutable laws.

Tech or biotech companies naturally operate with high PER ratios (often exceeding 100) because the market values their future potential. In contrast, sectors like banking or metallurgy tend to have low PERs (between 2 and 8) by nature of their business models.

Let’s take a real example:

• ArcelorMittal (steel): PER of 2.58
• Zoom Video (software): PER of 202.49

Does that mean Zoom is 78 times overvalued? Not necessarily. It means they operate in different economic universes.

Variants of the PER you should know

Shiller PER: Long-term perspective

Some critics point out that the traditional PER is too shortsighted, capturing only 12 months of earnings. The Shiller PER corrects this by using the average earnings over the last 10 years, adjusted for inflation. The theory suggests that these historical decades allow for a more accurate projection of the next 20 years.

The formula: Market capitalization ÷ (Average earnings over 10 years adjusted for inflation)

Normalized PER: comprehensive perspective

This approach goes further. It takes the market cap, subtracts liquid assets, adds financial debt, and divides by free cash flow instead of net profit. This filters out the “chaff” from the “grain”: isolating which profits come from the actual business versus one-off operations (asset sales, for example).

The lesson from Meta and Boeing: divergent movements

Observe how the market sometimes defies what the PER suggests:

Meta (Facebook): Years ago, while its PER was decreasing (sign of rising profits), the stock price was rising. Perfect model. But since late 2022, the stock fell even with lower PER ratios. Why? The Federal Reserve raised interest rates, impacting tech stocks regardless of their fundamentals.

Boeing: Its PER has fluctuated within relatively stable ranges, and the stock price has followed correlated movements. Here, the behavior was more predictable, though not without volatility.

These stories teach us that the PER is necessary but insufficient.

Never invest based solely on PER

The critical weakness: the PER is a static snapshot, not a movie of the future. A company with a low PER is not always a bargain; it could be close to bankruptcy, poorly managed, or cycling through a recessionary phase.

Cyclical companies (industry, construction, banking) distort the PER analysis especially. At the peak of the cycle, they have low PER (maximum earnings); at the trough, they have high PER (minimum earnings). Investing in both phases without context is a trap.

Complement with other ratios

For a robust analysis, combine the PER with:

• EPS: Earnings per share (direct complement)
• Price/Book Value: Price-to-equity ratio
• ROE: Return on equity
• ROA: Return on assets
• RoTE: Return on tangible equity

Also, spend time studying the composition of profits: do they come from operational business or extraordinary asset sales?

Value Investing and PER: a natural relationship

Value Investing strategists—those seeking “good companies at good prices”—use the PER as a compass. It’s no coincidence that value funds like Horos Value Internacional or Cobas Internacional typically operate with PER significantly below their reference categories (7.24 vs 14.55 in one cited case).

Concrete advantages of the PER

✓ Simple calculation and accessible data without technical expertise ✓ Quick comparison between companies in the same sector ✓ Works even for companies that do not pay dividends ✓ Universally recognized metric by investors and analysts

Its inevitable limitations

✗ Only considers profits from one year to project the future ✗ Not applicable to companies with losses (no PER in red) ✗ Static reflection, not dynamic; does not capture management changes or emerging trends ✗ Especially misleading in cyclical companies

Conclusion: use the PER intelligently

The PER is an indispensable tool in fundamental analysis, but it should never be the only compass. Its greatest value arises when you use it to compare companies within the same sector under similar market conditions.

An investment based solely on seeking the lowest PER is a recipe for disaster. There are companies on the brink of insolvency with low PER precisely because no one trusts them.

The true art lies in combining the PER with other key metrics, studying the company’s fundamentals for at least 10-15 minutes (not seconds), and then—only then—making an informed decision. This way, you will build interesting and, above all, long-term profitable portfolios.