## PER: The Valuation Secret Every Investor Should Know

If you want to make informed decisions in the stock market, you must understand the **key metric of PER**. This simple yet powerful ratio directly tells you whether a company's stock price is worth its value.

### Why is PER so critical

**PER (Price/Earnings Ratio) measures how much investors are willing to pay for each unit of a company's earnings.** In simple terms, if a company's PER is 15, it means that based on current profits, it would take 15 years to recover the investment through earnings.

This indicator is indispensable in fundamental analysis because it quickly reveals whether a company is overvalued or undervalued. When combined with other metrics like EPS (Earnings Per Share), PER becomes an essential tool for value investors.

### How to calculate PER

There are two equivalent ways to calculate PER, both yielding the same result:

**Method 1 (Overall):** Divide the company's market capitalization (total stock price) by net profit

**Method 2 (Per share):** Divide the stock price by earnings per share (EPS)

These formulas are essentially the same, just from different perspectives. Since these data are readily available for listed companies, you can easily calculate PER yourself or check it directly on any financial website.

### Real-world example: How PER works in practice

Understanding PER's practical significance can be seen through the case of Meta (formerly Facebook). Between 2020-2022, the stock price of this tech giant kept rising, while PER kept decreasing — a sign of healthy growth. A low PER alongside rising stock price indicates that the company's profit growth outpaced its stock price increase, meaning true value is improving.

However, after the end of 2022, the situation reversed. Although PER continued to decline, Meta's stock price fell. Why? The Federal Reserve's rate hikes changed market expectations for tech stocks, reducing the price investors are willing to pay for potential gains. This shows that **PER is just a static valuation snapshot and cannot replace understanding the market environment**.

The Boeing example is even more insightful. This aerospace manufacturer’s stock price fluctuated wildly, but PER remained within a stable range. In such cases, relying solely on PER cannot explain stock movements; you need to consider company operations, industry cycles, and other factors.

### How to interpret PER in practice

Investors typically interpret PER values as follows:

**PER between 0-10** — Looks attractive but be cautious. This may indicate market pessimism about the company's prospects, fearing profit decline. Cheapness often has reasons.

**PER between 10-17** — The most comfortable range for analysts. It reflects reasonable growth expectations without seeming excessive. Most stable companies fall into this range.

**PER between 17-25** — Ambiguous signals. It could be due to recent strong performance boosting valuation or potential bubble risks. Further investigation is needed.

**PER over 25** — Dual interpretations. Either the market has high confidence in the company's future and expects explosive growth, or it’s overhyped and a bubble. Both are possible.

### Why you can't rely on PER alone

Here's the key point: **Relying solely on PER for stock selection will inevitably fail.**

ArcelorMittal, one of the world's largest steel companies, has a PER of only 2.58. This number is ridiculously low, but not because it's a bargain — rather, because cyclical industries like steel have highly volatile profits, and investors doubt their stability.

In contrast, Zoom Video's PER reaches 202. During the 2020 pandemic, this video conferencing software became a darling, with investors willing to pay a premium for its potential.

The same PER value means completely different things across industries. Tech stocks and biotech companies naturally have high PERs due to growth potential premiums. Banks and industrials tend to have lower PERs.

### PER must be used with other indicators

A standalone PER is like looking at only one financial snapshot. True investment analysis requires:

- **BPA (Earnings Per Share):** To confirm profit trends behind PER changes
- **Price/Book Ratio:** An additional dimension of asset value
- **ROE and ROA:** To measure how efficiently a company generates profits
- **Free Cash Flow:** A more realistic picture of cash than accounting profits

More importantly, you need to understand the company's business model deeply. Sometimes high profits come from one-time asset sales rather than ongoing operations. For example, in 2017, Banco Santander in Spain "sold" a bankrupt national bank for €1 — seemingly a huge bargain, but in reality, it was because of massive debt assumption — in such cases, simple PER calculations can mislead you completely.

### PER and value investing

The value investing school particularly favors PER. Their philosophy is "buy quality companies at reasonable prices," and PER is a tool to identify those "reasonable prices."

Look at the performance of professional value investment funds. The Horos Value Internacional fund has a PER of 7.25, well below the average of 14.56 for similar funds. Cobas Internacional's PER is even lower at 5.47. They systematically seek out undervalued quality companies to build their portfolios.

### Don't ignore PER's limitations

- **Cyclical traps:** Cyclical stocks have the lowest PER at the peak of the cycle (highest profits) and the highest PER during downturns (profits plunge). Buying at the cycle's bottom based on PER often means buying at the top.

- **Unprofitable companies:** Loss-making firms have no PER, making this metric invalid for startups and restructuring companies.

- **Short-term flaw:** PER only reflects past 12 months' performance and cannot predict future results. A company that shined last year might collapse this year.

- **Static nature:** PER is like a static photo, unable to show a company's dynamic growth trajectory and management quality.

### Final advice

**PER is an essential tool to understand, but it’s not the whole story for stock selection.** Use it as a preliminary screening metric — quickly identify whether a stock is obviously overvalued or undervalued. Then spend 10 minutes reading the company's financial reports, understanding its competitive advantages, management team, and growth prospects.

By combining PER with other fundamental indicators, you can build truly confident investment decisions. Remember, countless companies have attractive PERs but still fail in the end. Numbers never lie, but how you interpret them determines your returns.