PER in the stock market: The metric every investor must master to evaluate companies

When we set out to analyze a listed company to decide if it’s the right time to invest, there is an indicator that appears constantly across all financial platforms: the PER (or P/E depending on the region). But here comes the key question: do we really understand what it’s telling us? How to interpret it correctly without falling into the traps that many beginner investors make?

The PER is undoubtedly one of the fundamental pillars of fundamental analysis, along with EPS. It’s not an exaggeration to say that any investor who wants to make serious decisions must thoroughly understand how this metric works and, more importantly, what its limitations are.

Understanding the PER: beyond a simple division

The PER (Price/Earnings Ratio or Price/Earnings Ratio) shows us how many times the market is willing to pay for each euro of profit generated by a company. In other words, it’s the ratio between a stock’s market price and the company’s periodic earnings.

Let’s imagine a practical example: if a company has a PER of 15, it means that its current earnings (projected over 12 months) would need 15 years to match the company’s market value. This metric is part of the six essential ratios for analyzing a company’s health, along with EPS, P/VC, EBITDA, ROE, and ROA.

What’s interesting is that the PER in the stock market doesn’t work uniformly. In some cases, we’ll see that while the PER decreases (which could indicate greater efficiency), the stock price rises. This usually happens when a company consistently increases its profits. However, at other times, especially during changes in monetary policy or external macroeconomic factors, a company’s stock can fall even with a low PER.

How to calculate the PER

The calculation is surprisingly simple. There are two equivalent ways:

First formula (using global magnitudes): PER = Market Capitalization / Net Profit of the Company

Second formula (using per-share data): PER = Share Price / EPS (Earnings Per Share)

Both will give us the same result. Let’s look at two practical examples:

Case 1: A company with a market capitalization of $2.6 billion and net profit of $658 million has a PER of 3.95.

Case 2: A company where each share costs $2.78 and generates $0.09 of profit per share has a PER of 30.9.

The advantage is that these data are available on any financial portal, from Infobolsa in Spain to Yahoo Finance in the United States, making it easy for anyone to do the calculation on their own.

Variants of the PER you should know

There isn’t just one PER. There are variations that analysts use depending on their needs.

The Shiller PER is an alternative that many consider more robust. Instead of taking only the profits of a single year (which can be volatile), it uses the average profits over the last 10 years adjusted for inflation. The underlying theory is that by observing a decade of results, we can better forecast the next 20 years.

The normalized PER takes a different approach: in the numerator, it places market capitalization minus liquid assets plus financial debt; in the denominator, it uses Free Cash Flow instead of net profit. This approach is especially useful when there are complex acquisitions or intricate financial structures that the traditional PER might not accurately capture.

Interpreting the PER: not everything that glitters is gold

The interpretation of the PER in the stock market usually follows this scheme:

• Between 0 and 10: Apparently low attractiveness, but it could also indicate that profits are about to fall
• Between 10 and 17: The preferred zone for analysts, indicating potential growth without excessive speculation
• Between 17 and 25: Could signify recent strong growth or the beginning of a bubble
• Over 25: Very positive market projections or possible extreme overvaluation

However, here comes the important warning: a low PER does not guarantee that a company is a bargain. In fact, many bankrupt companies have low PERs because no one trusts them. The market can keep a undervalued company for years if its management is poor.

Sector context determines the interpretation

A critical aspect many investors overlook: the PER is not interpreted the same across all sectors.

Heavy industry companies (like ArcelorMittal, with a PER of 2.58) naturally have a low PER. Tech and biotech companies operate in a completely different range. Zoom Video, for example, reached a PER of 202.49 at its peak. Comparing the PER of a construction company directly with that of a tech startup is like comparing apples to automobiles.

Combining PER with other tools: true fundamental analysis

This is the most important lesson: never invest based solely on the PER.

Always combine it with other indicators such as EPS, P/VC, ROE, ROA, and RoTE. Also, spend time studying the composition of profits: do they come from core business or from a one-time sale of assets? Is the company in a growth or maturity phase? How is its debt structure?

Value Investors (seeking good companies at a fair price) often use the PER, but always in conjunction with business quality and management analysis.

Advantages and limitations of the PER

Advantages:

• Easy to obtain and calculate
• Allows quick comparisons between companies in the same sector
• Works even for companies that do not pay dividends
• Widely recognized standard

Limitations:

• Only considers profits from one fiscal year to project future performance
• Not applicable to companies with losses
• Static, does not capture future management changes (or dynamic aspects)
• Especially misleading in cyclical companies, where a low PER at the cycle peak can be a trap

Conclusion: a powerful but incomplete tool

The PER in the stock market is a valuable metric, especially for comparing similar companies within the same sector and geography. But it’s only one piece of the puzzle. A solid investment requires combining the PER with in-depth fundamental analysis, management evaluation, sector trend analysis, and understanding the macroeconomic context.

Spend the 10 minutes necessary to truly delve into the company, use the PER as an initial reference but not as a final decision, and you will build a serious and potentially profitable investment strategy.