What is PER (Price Earnings Ratio)?
The Price Earnings Ratio (PER) is an indicator that shows how many times a stock's price is relative to its earnings per share (EPS). It is one of the most widely used fundamental metrics for determining whether a stock is undervalued or overvalued.
The formula is straightforward: PER = Stock Price / EPS (Earnings Per Share). For example, if a stock is priced at 2,000 yen and the EPS is 100 yen, the PER is 20x. This means it would take 20 years of earnings to recover the investment amount.
Key Concepts of PER
PER Benchmarks
General guidelines for PER in the Japanese stock market:
- PER below 10x: Often considered undervalued
- PER 10-20x: Considered a fair valuation range
- PER above 20x: Often considered overvalued (though high PER is acceptable for growth companies)
PER Varies by Industry
The appropriate PER level differs significantly by sector:
- Banking, insurance, and financial sectors: Tend to have lower PERs (around 8-12x)
- Food, consumer goods, and stable industries: Moderate PERs (around 15-20x)
- IT, biotech, and growth sectors: Tend to have higher PERs (30x or more is not uncommon)
Therefore, it is important to compare PER among companies within the same industry.
Caveats About PER
- PER cannot be calculated for loss-making companies: When EPS is negative, PER is undefined
- One-time gains can make PER appear low: Special profits may temporarily inflate EPS, making the PER look artificially low
- Low PER does not always mean a bargain: If declining earnings are expected, the stock price may have already fallen, resulting in a low PER
Key Points for Beginners
- PER is one of the most fundamental metrics in financial analysis. Make checking PER a habit as the first step in evaluating whether a stock is fairly priced
- Do not rely on PER alone for investment decisions. Combine it with PBR (Price to Book Ratio), ROE (Return on Equity), and other metrics for comprehensive analysis
- Compare a company's PER with its industry average to determine if it is undervalued or overvalued within its sector
- PER is easily accessible on brokerage apps and websites. Always check it when analyzing stocks
Summary
PER (Price Earnings Ratio) is a fundamental stock metric showing how many times a stock trades relative to its EPS. While a lower PER generally suggests undervaluation and a higher PER suggests overvaluation, appropriate levels vary by industry, making sector comparisons essential. Beginners should use PER as a starting point and combine it with other fundamental metrics to improve the accuracy of their investment decisions.