PER

PER is a metric to represent the ratio of a stock price to an earning per stock. Price Earnings Ratio, P/E.

Overview of PER
PER (Price Earnings Ratio) is an index to tell "how many years will be required to recover the investment if all the profit is allocated to dividend." It can be computed as follows.

PER = Stock Price / Current Term Net Income per Stock

In addition, it can also be calculated from the following equation.

PER = Stock Price / Current Term Net Income per Stock =(Aggregate Market Value / # of Stocks Issued) / (Current Term Net Income / # of Stocks Issued) = Aggregate Market Value / Current Term Net Income

By comparing a stock price and the company's profit-earning capacity, we can judge the investment value of the stock. The denominator of PER can be either of the following: The resulting PER is called Actual PER or Predicted PER respectively. Calculation of Predicted PER sometimes includes assessments by analysts.
 * Net income actually achieved in the previous term
 * Predicted net income at the end of the current term

The inverse of PER is "EPR," which indicates "the ratio of annual dividend to the amount of investment."

"Current Term Net Income per Stock," which is the denominator of PER is called EPS (Earnings Price Share).

How to Use PER
PER enables us to compare the stock price with the company's profit-earning capacity. PER is not an absolute criterion to determine "overvalued or undervalued." It should be treated as a relative index to be compared with In general, under a situation in which the stock market is relatively healthy, "PER is less than or equal to 20" is often said to be "undervalued (i.e. it does not take long time to recover the investment)." Regarding developing companies, since the increase in EPS is expected, often their PER is high.
 * Competitors
 * Past achievements

However, when judging whether "it is undervalued or overvalued," we need to check whether or
 * The stock price decreased because the company's business situation is not good
 * The company is not properly evaluated by the market

Relationship with Other Business Indices
When using business indices including PER, we must use multiple indices to evaluate the situation as a whole. Indices are significantly related to each other.

In addition, Then,
 * PER = Aggregate Market Value of Stocks / Net Income
 * PBR = Aggregate Market Value of Stocks / Shareholders' Equity at Book-value
 * ROE = Net Income / Shareholders' Equity at Book-value

PBR = Aggregate Market Value of Stocks / Shareholders' Equity at Book-value = [Net Income / Shareholders' Equity at Book-value] * [Aggregate Market Value of Stocks / Net Income]

So, we can derive the following relationship among PER, PBR, and ROE.

PER * ROE = PBR

From this relationship, we can say

When PBR is low, it is likely that ROE and PER are low as well.

Regarding cases in which one of them is abnormally low, we can conclude as follows.
 * If low PER and high ROE result in low PBR, there is no problem.
 * If high PER and low ROE result in high PBR, it is an undesirable situation.

Relationship between Offer Price and PER upon IPO
Upon IPO, if the expectation on a company is high, the first price will be higher than the offering price. Thereby, PER calculated based on the offering price will increase. On the contrary, if the expectation is low, the first price will get lower than the offering price, and thereby PER will decrease.

Tokyo Stock Exchange Mothers with high PER has higher stock prices than offering prices in both 2007 and 2008. On the other hand, JASDAQ and Tokyo Stock Exchange, which have low PER, have negative Public Offering Percentage Change in both years.

Related Articles

 * PBR
 * ROE