Understanding the PER Ratio: Meaning, Calculation, and Interpretation in Stock Market Analysis

What is the PER and Why Does It Matter in Investing?

When we delve into the world of fundamental analysis, we encounter indicators that are essential for properly evaluating investment opportunities. Among them stands out the PER ratio, whose initials correspond to Price/Earnings Ratio or, in more familiar Spanish terms, Price/Earnings Ratio.

This metric allows us to establish a direct relationship between the value the market assigns to a company (reflected in the stock price) and the profits it generates periodically. In other words, the PER shows us how many times the annual profit is embedded in the company’s market capitalization.

Put practically: if a company trades with a PER of 15, it means that its current earnings (projected over 12 months) would take 15 years to equal the company’s total value on the stock market. Along with EPS (Earnings Per Share), it constitutes one of the two fundamental pillars that should never be missing in any serious asset selection analysis for investment.

The Six Essential Ratios of Fundamental Analysis

The PER is part of a set of basic indicators that every investor should know:

1. PER - Price-to-Earnings Ratio
2. EPS - 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 to Calculate the PER Ratio: Two Valid Approaches

Calculating the PER is surprisingly simple. There are two equivalent methods that produce identical results:

Method 1 - Aggregate approach: