What is PER?
PER (also called P/E ratio) is calculated by dividing a stock's price by its earnings per share (EPS). If a stock trades at $100 and earns $5 per share, its PER is 20x, meaning investors pay $20 for every $1 of annual earnings. The S&P 500's historical average PER is approximately 16-17x. A PER of 25x or higher generally indicates that investors expect strong future earnings growth.
Interpreting PER
A low PER (below 12x) may signal an undervalued stock or a company with declining prospects. A high PER (above 25x) suggests high growth expectations or possible overvaluation. Technology companies often trade at PERs of 30-50x due to rapid growth expectations, while utilities and banks typically trade at 10-15x. Comparing PER within the same industry is more meaningful than across sectors. The Nikkei 225 average PER has ranged from 12x to 22x over the past decade.
Key Considerations
PER has limitations. It can be distorted by one-time charges, accounting differences, or cyclical earnings peaks and troughs. Negative earnings make PER meaningless. The Shiller CAPE ratio (Cyclically Adjusted PE) uses 10-year average inflation-adjusted earnings to smooth out business cycles and is a better predictor of long-term returns. A CAPE above 30 has historically preceded below-average returns over the following decade.