What is the Price Earning Ratio (PER)?

The PER concept is one of the most used indicators to know the valuation of a share and to analyze the financial situation of the company in terms of quotation, evolution in the market and shares. This term comes from the initials in English Price Earning Ratio, which translated into Spanish would be the price-earnings ratio.

The PER shows the number of times that the profit is included in the share price, although it could also be said that it is the number of years it takes to recover the investment taking into account the company's profits. The higher the PER, this means that investors are paying more for each unit of profit.

Therefore, the definition of PER will be of great value to know if a stock is undervalued or overvalued. To know the value of the PER, you have to divide the price of shares of a specific company in the stock market between the value of the net profit of the corresponding company between the number of issued shares.

How to calculate the PER

The most common PER formula is usually:

PER = Quoted price / Net profit

To simplify this calculation it is also possible to resort to another formula:

PER = Price per share / Net earnings per share

To better understand this concept we will use an example. Let's imagine that the shares of a company are trading at 60 euros per share and the net profit is 10 euros. In this case, your PER would be 6, which is the result of dividing 60 by 10. In the case of keeping this net profit permanently, it would take six years to achieve the necessary benefits to make the capital invested in the purchase of Actions.

Experts consider that this ratio is not the best option to invest in a company, since there are other more reliable ones.


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