Discover how PER helps you identify opportunities in the stock market

If you have ever been lost among numbers and financial ratios, today we will clear up a doubt that affects thousands of investors: what is the PER really, and why should it matter to you?

The PER: Your compass to measure the true value of a stock

Essentially, the PER (Price/Earnings Ratio) shows us a fundamental relationship: how many times the current price of a company represents its annual profits. Imagine a company with a PER of 15; this means that its earnings over one year would need 15 years to match what the market pays for it today.

This indicator is so important that it constantly coexists with the EPS (Earnings Per Share) in the portfolios of serious analysts. Together, they are part of the six essential ratios to understand business health: the PER, EPS, P/VC, EBITDA, ROE, and ROA.

Calculating the PER: Simpler than it seems

There are two ways to calculate it. The first divides the total market capitalization by the total net profit. The second, more direct, takes the price of an individual share and divides it by the EPS.

Both formulas give the same result because they measure the same thing from different angles. The beauty of the PER lies in its accessibility: the data you need is within reach of any investor with an internet connection.

Let’s look at practical examples:

Practical case 1: A company with a market cap of $2.6 billion that generated net profits of $658 million. Its PER = 3.95. A quite attractive value.

Practical case 2: A stock trades at $2.78 with an EPS of $0.09. Its PER = 30.9. Clearly overvalued in comparison.

The actual behavior of the PER in markets

Numbers don’t always tell the whole story. Observe what happened with Meta Platforms (Facebook): years ago, while the PER was consistently decreasing, the stock was rising. The reason? Expanding profits. That was the ideal scenario.

Then came late 2022. The Federal Reserve raised interest rates, and Meta suffered a dramatic fall, even with a decreasing PER. The change in market sentiment surpassed any technical metric.

Boeing presents another fascinating case: its PER remains stable in positive ranges while the stock goes up and down. Here, the critical difference is the quality of the results.

Interpreting the PER: Context is everything

Although the stock manual may tell you that a low PER is attractive, financial reality requires nuance.

Between 0 and 10: Potentially interesting, but be careful. It could indicate that profits will fall soon.

Between 10 and 17: The golden zone where analysts feel comfortable, suggesting sustainable growth.

Between 17 and 25: Either the company grew dramatically or we are in speculative bubble territory.

Above 25: Dangerous territory that could reflect extraordinary expectations… or collective delusion.

Here’s the crucial part: the same PER means different things depending on the sector. ArcelorMittal, a steel manufacturer, trades at a PER of 2.58. Zoom Video, on the other hand, reaches 202.49. Who is overvalued? The question makes no sense without sector context.

Advanced variants of the PER

Not all PERs are identical. The Shiller PER uses average inflation-adjusted earnings over ten years, trying to smooth out annual volatility. Some consider it more realistic; others see it as unnecessarily complex.

The normalized PER adjusts the entire calculation: replacing net profit with free cash flow and modifying the numerator by subtracting liquid assets and adding debt. It was especially useful to understand why Santander “bought” Banco Popular for one euro (actually took on colossal debt).

Why the PER alone is not enough

Here’s the secret that separates successful investors from those who lose money: never invest solely based on the PER.

Companies on the brink of collapse often look attractive in PER because the market has lost confidence in them. Serious analysis requires combining the PER with ROE, ROA, debt ratios, profit margins, and business composition.

Was the profit from core operations or from casual sale of a financial asset? Is the sector expanding or contracting? Is management competent? These questions are not answered by the PER.

The PER and the philosophy of Value Investing

Value investors (like the Horos Value International fund with a PER of 7.24 or Cobas Internacional with 5.47) build portfolios around low ratios, seeking “good companies at a good price.” The PER is their natural ally.

Strengths and limitations

Advantages:

• Easy calculation for anyone
• Quick comparison between competitors in the same sector
• Works even when companies do not pay dividends
• A metric every analyst consults

Disadvantages:

• Provides a snapshot of one year, not future projection
• Not applicable to companies without profits
• Static image, not dynamic
• Especially misleading in cyclical sectors (low in peaks, high in depressions)

Conclusion: One tool, not a complete answer

The PER deserves its place as a fundamental indicator, but think of it as a compass, not a complete map. It guides you toward potentially attractive companies, but only in-depth research reveals if they truly are.

A portfolio based solely on low PER ratios will end in disaster. Spend at least ten minutes understanding the company’s structure, combine the PER with other indicators (EPS, ROE, debt ratios), and make informed decisions about actual purchases. That’s how you turn a number into a profitable strategy.