PER: The Fundamental Metric Every Investor Must Master

Understanding the Basic Concept of the PER

When we talk about fundamental analysis in stock markets, there is a metric that stands out above others: the PER. This ratio, whose English name is Price/Earnings Ratio (Price/Earnings Ratio), represents the proportional relationship between a company’s market value and its periodic earnings.

Essentially, the PER answers a fundamental question: how many years of current (projected over 12 months) earnings would be needed to match the company’s total stock market price? If a company trades with a PER of 15, it means that its current earnings would take 15 years to reach the total market valuation.

Along with EPS (Earnings Per Share), the PER is part of the triad of indicators that no serious analyst can omit. These ratios, complemented by P/VC, EBITDA, ROE, and ROA, form the arsenal of tools to assess corporate health.

Practical Calculation of PER: Two Valid Approaches

There are two equivalent methodologies to obtain this ratio, each equally valid depending on the analysis context:

Method 1 - Global Magnitudes: The quotient between the company’s market capitalization and its annual net profit.

Method 2 - Per Share Approach: Divide the unit price of the share by the EPS (net profit per share).

Both formulas yield identical results, with the second option being more accessible for retail investors since the data is immediately available on any financial portal. In Spanish platforms, it appears under the name PER, while in American and British portals, it is listed as P/E.

Different Behaviors: What the Market Teaches Us

The PER does not always behave uniformly. Its dynamics depend on multiple external and internal factors. Let’s observe two paradigmatic cases:

Case 1: Meta Platforms (Facebook) For years, as Meta increased its profits, the PER systematically decreased while the share price rose. This reflected a scenario of profitable growth: the company earned more money and its valuation became more efficient. However, at the end of 2022, this pattern broke. Despite lower (more attractive apparently) PER ratios, the stock price plummeted. The reason: market expectations for tech stocks deteriorated with the interest rate hikes implemented by the FED.

Case 2: Boeing Here, we observe a different behavior. The PER remains stable within predefined ranges, and the stock fluctuates accordingly. What matters is not the volatility of the indicator but its sign: periods of positive versus negative profits generate inversely correlated movements.

Specialized Variants of PER

There are modifications to the standard calculation that adapt the metric to specific contexts:

Shiller PER: Long-Term Perspective

The main criticism of the conventional PER lies in its short-sightedness: it only considers one fiscal year. The Shiller PER overcomes this limitation by using averaged profits over the last 10 years, adjusted for inflation. This methodology assumes that a decade of data provides enough predictive power to project two future decades.

Normalized PER: Comprehensive Financial Reality

This variant captures a more complete view by modifying both numerator and denominator. It takes the company’s market capitalization, subtracts its liquid assets, adds financial debt, and divides the result by Free Cash Flow (instead of net profit). This approach was particularly relevant in controversial corporate operations, such as the acquisition of Banco Popular by Banco Santander, where an apparent symbolic purchase (1 euro) concealed the absorption of billions in debt.

Interpretation of PER According to Ranges

The significance of the PER varies according to its magnitude:

Range 0-10: Indicates initial attractiveness but signals potential future deterioration of profits.

Range 10-17: Preferred equilibrium zone for analysts, suggests sustainable growth without margin pressure.

Range 17-25: Ambiguous territory: may indicate accelerated business expansion or the early formation of a bubble.

Above 25: Double interpretation—extraordinarily optimistic projections versus excessive speculation.

The Critical Role of Sector Comparability

A common mistake is comparing PER across heterogeneous sectors. Mature industries like banking or steelmaking maintain structurally low ratios (e.g., ArcelorMittal with PER of 2.58), while technology and biotech exhibit high multiples (Zoom Video reached PER of 202.49).

This disparity reflects divergent growth expectations, not market irrationality. Therefore, analysis should compare “apples with apples”—companies within the same sector, geography, and economic cycle.

Inherent Limitations of PER

Despite its usefulness, the PER has significant drawbacks:

• Captures a static, not dynamic, snapshot of the company
• Not applicable to companies with negative or zero profits
• Vulnerable to accounting manipulations (a one-time benefit from asset sales distorts the ratio)
• Problematic for cyclical companies: maximum compression of PER at cycle peaks, maximum expansion at troughs

Integrating PER into Value Strategies

Value-oriented investors rely heavily on the PER as an initial filter. Reputable funds like Horos Value Internacional (PER of 7.24 versus 14.55 in the category) and Cobas Internacional (PER of 5.46) exemplify the search for “good companies at a good price” using this metric.

Strategic Combination with Other Indicators

A analysis based solely on PER is insufficient and naive. It must be complemented by:

• EPS (Earnings Per Share)
• Price/Book Value
• ROE and ROA
• RoTE (Return on Tangible Equity)
• Comprehensive analysis of business magnitude components

This triangulation avoids traps such as confusing genuine operating profits with gains from extraordinary events.

Summary: Strengths and Vulnerabilities

Main advantages:

• Easy to calculate and data readily available
• Comparative efficiency within sectors
• Applicable even to companies without dividend policies
• Benchmark metrics for professionals

Main disadvantages:

• Limited time horizon (one fiscal year)
• Not applicable to negative profits
• Static perspective without connection to future dynamics
• Complexity in cyclical sectors

Conclusion: Necessary but Insufficient Tool

The PER is an indispensable instrument in fundamental analysis, especially for peer comparisons under similar market conditions. However, an investment strategy based solely on this indicator will inevitably fail.

Companies in technical bankruptcy have low PER precisely because the market has lost confidence in them. The stock market history is full of examples of companies with seemingly attractive ratios that collapsed.

The correct approach requires dedicating time to dissect the company’s financial structure, examine profit quality, validate sector trends, and only then incorporate the PER as a variable within a system of complementary metrics. This comprehensive approach is the only solid foundation for building profitable and resilient portfolios.