There are stock market terms that every investor should know and the PER is one of them. This is one of the most used formulas for valuing an action and you will usually see it among your broker reports.
What is PER?
The Price Earnings Ratio or PER can be translated as a price-earnings ratio. It is a formula that measures the relationship between the price of a stock in the market and the benefits offered by the company.
For an investor the PER will tell you the years that the profit of a company is contained in the share price.
How PER is calculated
The PER is calculated by dividing the market capitalization of a company between its net profit. If we want to know the price-earnings ratio of a particular bond, it will suffice to take as a benchmark the price per share and divide it between the net profits per share.
What the PER tells us
Now that the bases are clear, what is PER? How can you interpret this data? The ratio is mainly used to measure whether a stock is expensive or cheap at that time and will give us information about the years it would take to recover the money invested in the company through its profits as long as they remain stable.
As an example, a bond that is listed at 120 euros with a profit per share of 10 euros will have a PER of 12. That is, if we invest it would take 12 years to recover the money through the dividends. The problem with every number is that it is difficult for us to say something by itself. Is a PER of 12 high? It’s okay? Everything will depend on the context.
And in order to be able to measure the PER of a stock under conditions, it is necessary to compare it with the historical PER of the company to see possible deviations, with the average PER of the market, that of the sector and even the historical PER of the market. This latest figure is around 15.
From there, there are a series of scales that will help us to identify whether a PER is right or not .
Per bass (0-10): It is often indicated that the stock is undervalued, although it may also be because the profits of the company are falling.
Per half (10-20): We are facing a strip in which the return on investment is considered to be in adequate scales.
Per high (+20) it is typical of companies in growing sectors, although it is usually indicative of a company being overvalued. You could also tell us that the company’s latest profits were low, but for extraordinary reasons like asset acquisition.
Can we trust the PER to buy a stock?
The PER is one of the most used indicators. If we are attentive to the news we will hear it constantly in the mouth of the analysts. It is a useful indicator because at a first glance it gives us an overview of the state of the business by fundamentals, but should never be used as a single element of value. In fact, a professional investor would never do it.
And, as we have just seen, the PER can lead to error. That is why when investing it is essential to use more than one tool to help us make decisions and value companies, funds, or the instrument that we want.
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