The PER Metric: Your Compass in Stock Selection

When faced with the decision to invest in a listed company, we need reliable tools to assess whether it is truly worth it. Among all the indicators analysts use, the PER (Price/Earnings Ratio) stands out as one of the most consulted, along with EPS. But what does this number really tell us?

Understanding what PER measures

The PER metric reflects the relationship between the price we pay for a stock and the profits the company generates periodically. The name comes directly from its English initials: Price/Earnings Ratio, which we translate as Price/Earnings Ratio.

In simple terms, PER indicates how many years it would take for current (projected 12-month) profits to cover the company’s market price. If a company has a PER of 15, it means that its annual earnings would pay for the total value of the company in 15 years.

Within fundamental analysis, PER is part of a set of 6 essential ratios:

1. PER - Price/Earnings ratio
2. EPS (Earnings Per Share) - Earnings per share
3. P/BV - Price to book value
4. EBITDA - Earnings before interest, taxes, depreciation, and amortization
5. ROE - Return on equity
6. ROA - Return on assets

How this metric is calculated in practice

The calculation of PER admits two approaches, although both yield the same result:

Option 1: Using aggregate figures
Market capitalization ÷ Net profit = PER

Option 2: Using per-share data
Share price ÷ Earnings per share (EPS) = PER

Both formulas require accessible data: market capitalization (price × number of shares) and profits, which appear on any financial portal. That is, any investor can perform these calculations in seconds.

Where to find this information: it systematically appears on platforms like Infobolsa, Yahoo! Finance, or Google Finance, often under the designation P/E on Anglo-Saxon websites.

Practical example A: A company with a market cap of 2.6 billion dollars and net profits of 658 million results in a PER of 3.95.

Practical example B: If a stock costs $2.78 and its EPS is $0.09, the resulting PER is 30.9.

The variants of PER you should know

There is no single way to interpret this metric. Variations exist that adjust calculations according to different criteria:

Shiller PER: The long-term perspective

Criticism of the traditional PER points out that it only uses profits from one year—a too short and volatile horizon. The Shiller PER solves this by using the average profits of the last 10 years, adjusted for inflation.

The fundamental difference lies in the analysis period. While conventional PER captures a snapshot of the current moment, the Shiller PER provides a more robust picture based on a decade of data. Theoretically, these 10 years of historical data allow projecting results for the next 20 years.

Normalized PER: Beyond accounting profit

This variant focuses on the company’s real financial health:

Market capitalization - Liquid assets + Financial debt ÷ Free cash flow = Normalized PER

This calculation is especially useful when a company hides its true situation behind inflated profits. The case of Banco Santander buying Banco Popular for 1 euro illustrates this: it was actually assuming massive debt that other entities rejected, something a normalized PER would have revealed more clearly.

How to interpret it: Reading ranges

Traditional interpretation suggests:

• 0 to 10: Low PER, potentially attractive, but a warning sign of future profit declines
• 10 to 17: Preferred zone for analysts, indicates expectations of balanced growth without overexposure
• 17 to 25: Suggests strong recent appreciation or approaching overvaluation
• Greater than 25: Dangerous territory indicating very optimistic projections or a bubble in development

However, this interpretation requires context. The market does not operate solely based on PER. Companies with low ratios may be close to bankruptcy precisely because no one trusts them.

Why sectors produce radically different readings

Here is the trap many novice investors fall into: comparing companies from different sectors using only PER is a mistake.

Banks and industries typically maintain low PER—ArcelorMittal (steel) operates with a PER of 2.58. Meanwhile, tech companies like Zoom display PERs of 202.49. Both can be correctly valued within their sectors.

The reason: sectors with lower growth expectations (heavy industry, traditional finance) receive low multiples. Sectors with accelerated expansion potential (technology, biotechnology) justify high multiples.

The real lesson: PER does not compete alone

Becoming an expert in PER is only the first step. No serious investment is based solely on this metric. It should be combined with:

• EPS: to validate profit consistency
• Price/Book Value: perspective on real assets
• ROE and ROA: efficiency in generating earnings
• RoTE: return on invested capital
• Qualitative analysis: business composition, management, competitive position

A high profit momentarily may come from asset sales unrelated to normal operations. A company with a low PER but consistently depressed likely faces structural problems.

Operational advantages of PER

• Immediate calculation, accessible to any investor
• Quick comparison between companies in the same sector
• Universal metric consulted by professionals and amateurs
• Works for companies that do not pay dividends

Real limitations of PER

• Only captures profits from 12 months—a arbitrary and volatile period
• Inapplicable to companies without current profits
• Reflects a static situation, not dynamic
• Cyclical companies can be misleading: low PER at peaks, high PER at troughs

Connection with Value Investing

Value Investing investors prioritize PER as an initial filter. Their philosophy—look for good businesses at a good price—finds potential opportunities in low ratios. Funds like Horos Value Internacional FI operate with a PER of 7.24 compared to 14.56 of its category, exemplifying this approach.

Practical conclusion

PER is an indispensable but insufficient tool. It works best for comparing competitors within the same sector and geography. It is your first filter, not your sole decision.

An investment strategy based solely on seeking low PER will inevitably fail. The market often undervalues companies temporarily, but a consistently depressed PER usually reflects poor management, not opportunity.

True mastery involves combining PER with thorough analysis of operational magnitudes, business management, and sector dynamics. Spending real time examining the company’s fundamentals builds solid, profitable long-term investment projects.