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PER (Price-to-Earnings Ratio): Understanding its Importance in Stock Valuation

PER (Price-to-Earnings Ratio) is one of the widely used financial indicators in the stock market, comparing a company’s stock price to its earnings. This article provides detailed explanations about the significance, calculation method, and applications of PER.

1. What is PER?
2. How is PER calculated?
3. What are the applications of PER in investment?

What is PER?

PER indicates the ratio of a company’s stock price to its earnings per share. In other words, it shows how many times the stock price exceeds the earnings. A higher PER suggests that the stock price is highly valued relative to the company’s actual earnings, while a lower PER indicates that the stock price is undervalued relative to earnings.

How is PER calculated?

PER is calculated by dividing the market capitalization of a company (number of shares × stock price) by its net income for the period. Specifically, PER = Stock Price ÷ Earnings Per Share. Generally, companies with higher PER are considered to have high growth potential and are expected to have future profit growth. On the other hand, companies with lower PER are considered to have high stability and may be evaluated as attractive investment opportunities due to their undervaluation.

What are the applications of PER in investment?

PER serves as a crucial source of information for investors when evaluating company stocks. Companies with high PER are perceived as having growth potential, allowing for higher stock prices. Conversely, companies with low PER are considered undervalued in terms of their stock prices relative to earnings, making them attractive investment opportunities for investors. However, it’s important to conduct comprehensive analysis not only based on PER but also considering company performance, market conditions, and other financial indicators.

PER is a significant financial indicator widely used in the stock market, comparing a company’s stock price to its earnings. For investors, PER serves as an important source of information for assessing company valuation and investment opportunities.