Per the Stock Market: The Fundamental Metric Every Investor Must Master

Why the PER is the indicator you can’t ignore

When it comes to selecting stocks for your portfolio, there is one number that constantly appears: the PER. It’s no coincidence. This metric is probably the most used indicator alongside the EPS (Earnings Per Share) to determine if a company is truly worth what the market is paying.

The PER answers a key question: how many times does a company need to generate its current profits to match its market value? That is, if a company has a PER of 15, it means that its earnings over one year would have to be repeated for 15 consecutive years to justify today’s market price.

The importance of the PER goes beyond simply comparing companies. It also allows you to track how a company’s financial health evolves over time. When you see the PER decrease while the stock price rises, it generally means the company is becoming more profitable—exactly what happened with Meta Platforms in its best years, when the company accumulated earnings while its ratio compressed.

Definition: What does the PER really mean

The PER is a ratio that measures the link between a stock’s market price and the company’s periodically obtained profits. The initials come from the English Price/Earnings Ratio, literally Price/Earnings ratio.

Among the six essential ratios for analyzing any listed company, the PER ranks first:

1. PER (our protagonist)
2. EPS
3. P/VC (Price/Book Value)
4. EBITDA
5. ROE (Return on Equity)
6. ROA (Return on Assets)

Essentially, the PER shows how many times a company’s market capitalization exceeds its annual profits. If a company has a PER of 15, its present (projected over 12 months) earnings would need 15 years to fully cover its current valuation.

How to calculate the PER: Two methods, one result

There are two equivalent formulas to obtain this metric. Both give you the same information, just approached from different angles.

Method 1: Using total company figures

Market Capitalization ÷ Net Profit = PER

Method 2: Using per-share data

Share Price ÷ EPS (Earnings Per Share) = PER

The reason both work is simple: if you multiply the second formula above by the number of shares outstanding, you get the first formula.

The best part of both methods is that the data is easy to find. Any financial platform has this information available. On Spanish portals like Infobolsa, it appears under the initials “PER,” while on American sites like Yahoo! Finance, it is usually called “P/E.” It’s the same indicator with different names depending on the region.

Practical PER calculation examples

To see how it works in reality:

Case 1: An industrial company

A company has a market capitalization of $2.6 billion and net profits of $658 million in the last year.

PER = 2,600 ÷ 658 = 3.95

Case 2: A growth tech company

A tech firm trades at $2.78 per share with an EPS of $0.09.

PER = 2.78 ÷ 0.09 = 30.9

Notice the huge difference. It’s not an error—this reflects that the market has much more optimistic expectations about the tech company, paying today for future earnings it expects to achieve.

Advanced variants: Shiller PER and normalized PER

The Shiller PER: Long-term view

A common critique of the standard PER is that it only looks at one year of profits, a very short horizon. The main difference between PER and Shiller PER lies in the time frame.

The Shiller PER extends the analysis to 10 years of inflation-adjusted average earnings. The theory behind it is that these 10 historical years allow for a more accurate forecast of the next 20 years of profits.

Shiller PER formula: Market Capitalization ÷ Average Earnings (over the last 10 years, adjusted for inflation) = Shiller PER

The Normalized PER: True financial health

This method goes further, adjusting for the company’s actual financial structure:

Formula: (Market Cap - Liquid Assets + Financial Debt) ÷ Free Cash Flow = Normalized PER

The normalized PER is especially useful in complex mergers. When Banco Santander acquired Banco Popular “for 1 euro,” the reality was that it assumed billions in debt. The normalized PER would have shown this truth much more clearly than the standard PER.

Interpreting the PER: What the numbers really mean

Once you have the number, what do you do with it? The interpretation of the PER depends on the context:

Here’s the critical part: you cannot rely solely on these interpretations. There are bankrupt companies with low PER because no one trusts them. The market already punishes them severely. On the other hand, high-growth tech companies naturally have high PERs because they reinvest earnings into expansion.

The sector matters: Comparing apples to apples

This is the key many novice investors overlook: you can only compare PERs between companies in the same sector.

See these differences:

• Arcelor Mittal (steel and industry): PER of 2.58
• Zoom Video Communications (software): PER reaching 202.49

Why such a difference? Because sectors like banking and industry know their earnings are predictable and limited, so the market pays no premium. Tech companies, on the other hand, promise exponential growth, justifying seemingly crazy valuations.

The common mistake is to say “Arcelor Mittal is cheaper than Zoom.” Incorrect. They are in completely different universes. You should compare Arcelor Mittal with other miners and steelmakers. And Zoom with other SaaS platforms.

Value Investing and the obsession with low PER

There is a completely PER-based investment strategy: Value Investing, which seeks solid companies at reduced prices.

Look at these real examples:

• Horos Value Internacional FI: PER of 7.24 (versus 14.56 in its category)
• Cobas Internacional FI: PER of 5.47 (versus higher category levels)

These Value funds constantly seek stocks with a PER below the sector average. The theory is that eventually the market will revalue them once it recognizes their underlying value.

Limitations you should know

The PER is powerful but has serious limitations:

Not applicable to companies without profits: If a company has losses, you cannot calculate PER. It simply doesn’t work with negative numbers.

Static, not dynamic: The PER shows yesterday, not tomorrow. A company may have a good PER today but face serious management problems tomorrow.

Deceptive in cyclical businesses: Cyclical companies (mining, construction, banking) have very low PERs in economic booms and very high in crises. The indicator doesn’t capture this well.

Manipulable: If a company sells a major asset in the last quarter, its “profits” are artificially inflated, misleadingly lowering the PER.

Combine PER with other indicators

This is fundamental: never invest based solely on PER. Always combine it with:

• EPS: To see if profits are growing or falling
• ROE: To verify if the company generates decent returns on equity
• Price/Book Value: To compare price against real assets
• Free Cash Flow: More reliable than accounting profits
• Business analysis: Where do profits really come from? Core business or one-off sales?

Serious investing requires deep understanding of financial statements, the business model, and recognizing the real risks the company faces.

Conclusion: The PER as a tool, not as an answer

The PER is probably the fastest indicator to get a first impression of whether a stock is expensive or cheap. Within the same sector and region, it’s especially useful for initial comparisons.

However, an investment strategy based solely on low PER will fail. There are too many companies on the brink of collapse with low PER precisely because the market has already lost confidence in them.

The right approach is to use the PER as a starting point, never as the final answer. Combine it with cash flow analysis, management quality, competitive position, and sector outlooks. Spend 10 real minutes understanding what a company does, not just the magic number you see on the screen.

When you combine the rigor of fundamental analysis with indicators like the PER, you will make solid investment decisions and, most importantly, achieve long-term profitability.