Syndicate
Price To Earning Ratio (PER)
The price to earnings ratio is calculated as follows:
PER = share market price
Benefits per share in the last 12 months
Continuing with our example, we can see that the society XYZ obtained a benefit of 10 in the last 12 months. Let?s now suppose that it has in shares in circulation and that its quotation is of 40 dollars, so with this information the PER would be calculated as follows:
PER = 40 = 40
1
What interpretation can you give to PER of 40 in relation to a determined number of shares?
Before anything, we must emphasize that this figure does not say absolutely nothing if it is not compared with that of other companies that operate in the same sector, as with also to those of all the whole market. Also, you have to have in mind that the PER of a determined number of securities is only significant when it is compared with the PER of the former years.
You must consider the PER as an expression of affection of the market towards a determined company and by extension, to its securities; in no way is it as important to measure the value of a company as could be the indexes of ?profitability of the own funds or that of the growth rhythm.
Recently, some comparative studies have been made between the historical results obtained in the market for securities of high PER and those obtained for low PER securities. These studies have allowed discovering that, in general, the low PER securities (10 or less) had better results than those with high PER (30 or more).
There are several reasons to justify this. In the first place, securities with high PER, due that they are in great proportion property of large investors, they are usually more volatile due that this type of investors buy and sell at a faster rhythm. In the second place, a high PER might mean that the market has taken into account the future growth; that is, that the price of securities reflect the future growth in the sales and on the benefits.
The results of these studies makes us think that the individual investors should be more careful when exploring the possibility of investing in high PER securities.