Valuation

PER (Price-to-Earnings Ratio)

Price-to-Earnings Ratio

At a glance

A core valuation metric showing how many times earnings per share (EPS) a stock trades at.

PER = Current share price ÷ Earnings per share (EPS, TTM)

A low PER is sometimes read as a low share price relative to earnings, but companies with slow growth or high risk also show low figures.

In plain terms

Imagine buying a shop. If that shop earns $10,000 a year, paying $150,000 for it means you're paying "15 years' worth of earnings." In that case, the PER is 15x.

Stocks work the same way. A PER of 15x means that, assuming current earnings stay the same, the share price is set at 15 years' worth of the company's earnings per share (EPS). That's why PER is the most basic yardstick for seeing the share price relative to earnings.

Here, EPS is measured on a TTM (Trailing Twelve Months) basis. It adds up the four most recently completed quarters, smoothing out results that swing from quarter to quarter into a single year's figure.

How many years of earnings make up the price

Share price — what one share costs$225

Divide it by what the company earns per share in a year

Earnings per share in one year$15

year 1 · $15year 15 · $225

모두 15칸

P/E of 15

If it keeps earning at this pace, it takes 15 years to earn back the share price.

Each cell is one year of earnings. The whole point of the picture is that the top bar (the price) and the 15 cells below are the same length.

More earnings means fewer cells, fewer earnings means more. If the company is loss-making there are no cells to count, so there is no P/E.

The figures belong to a made-up company, Example Inc. Every picture in this glossary uses the same company, so you can see how the metrics connect.

What it tells you

PER alone tells you "how much the market is willing to pay for this company's earnings." Between two companies earning the same amount, if one trades at 40x and the other at 10x, the market expects the former's future earnings to grow much faster.

So PER isn't simply a matter of "share price level" — it's also a tool for reading back the market's growth expectations already baked into that price.

Formula

PER = Current share price ÷ Earnings per share (EPS, TTM)

What high or low means

A low PER is sometimes read as a low share price relative to earnings, but companies with slow growth or high risk also show low figures. Conversely, a high PER may signal large expectations for future growth, or it may simply mean the share price level is high.

Normal PER levels differ greatly by sector (high-growth software tends to be high; mature banks and telecoms tend to be low). So the relative position within the same sector is more meaningful than the absolute number.

Caution

A low PER doesn't always mean the price sits below the value. When a business is in decline and the market has already priced in falling future earnings by pushing the share price down, PER also comes out low (the so-called "value trap"). So PER alone doesn't separate the reasons behind a low multiple — those show up when you place it alongside ROIC (Return on Invested Capital) or the revenue trend.

In highly cyclical industries (semiconductors, steel, etc.), PER can move in the opposite direction. When earnings are at a peak, PER is at its lowest (the share price doesn't rise because earnings are expected to turn down soon), and right after a loss, when earnings are at the bottom, PER shoots up. In these industries, reading PER alone can easily lead you to read it backwards.

Net income, the denominator of PER, is swayed by one-time items such as gains on asset sales or temporary tax effects. If the company is in the red (EPS ≤ 0), the calculation is meaningless altogether. Also, forward PER, which uses estimated future earnings, and trailing PER, which uses past results, are separate numbers with different values (this glossary uses trailing TTM).

Story

Around 2000, during the "dot-com bubble," internet companies with little or no earnings — some with losses — traded at PERs of several hundred times. The optimism that "the internet is different; profits will follow later" heated up the market.

When the bubble burst, the Nasdaq plunged about 78% from its 2000 peak through 2002, and it took a full 15 years to recover its original high. It was an event showing that a share price unsupported by earnings eventually gives way before the yardstick called PER.

Metrics to read alongside

EPS (Earnings Per Share)

EPS is exactly the value you divide by (the denominator) when calculating PER. So when PER falls, whether it fell because the company earned more (EPS) or because only the share price dropped can only be told by looking at the two side by side. A good signal and a bad signal can both look like the same "low PER."

ROIC (Return on Invested Capital)

It's often unclear whether a low PER means "the price falls short of the value" or "the business has weakened and the market has marked it down in advance." Looking together at how well the core business earns on its capital (ROIC) helps distinguish a genuine opportunity from decline (a value trap).

PSR (Price-to-Sales Ratio)

If there is a loss and thus no EPS, PER cannot be calculated at all. In that case, PSR, which looks at revenue instead of earnings, is used to gauge valuation.

See it in real stocks

Search US stocks on Stocklore to see PER alongside the sector benchmark.

AAPL Apple Inc.SCHW The Charles Schwab Corporation DAL Delta Air Lines PINS Pinterest, Inc.MDT Medtronic plc VEEV Veeva Systems Inc.Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.