We had the opportunity to speak to you previously on the technical analysis and the financial analysis in Stock Exchange. The PER is, precisely, one of the ratios most used in Stock Exchange to study the viability of an investment in a company in a certain moment.
This ratio, the PER, or price earning ratio, from which his initials proceed, is an indicator used in the fundamental analysis of the company that establishes a comparison to us between the price of the action and the net profit of the company, that is to say, the number of times that the profit after taxes of the company is contained in the quotation of the action. Ésto would indicate us the time that we would take in recovering the investment, if we support it, and abiding exclusively by the factor benefits.
The formula to come to the calculation of the PER is the following one:
Quotation of the Action
PER = ùùùùùùùùùùùùùùùù -
Net profit for action
How do we use the PER?
It is a very simple ratio that shows us that higher the result of the indicator is, worse it will be for the investor, since it will mean, that, or the quotation is higher with regard to the net profits, or, these are lower with regard to the current quotation.
Nevertheless, we must bear in mind several important factors so that the analysis is as correct as possible:
- To compare the PER of companies of the same sector
Obviously, to verify the validity of the PER, and if this one is high or not, we must buy it with something. First of all, we will do this comparison with the PER of other companies that belong to the same sector. About nothing the PER of the Santander serves to know if then we it go to compare with of Railroad, for example, since his business is very different. Nevertheless, if we compare it with that of the BBVA, we will be able to say that the actions of the Santander are more expensive or more sales than those of the BBVA.
- To compare historical PER
It is very interesting to compare the historical PER of the proper company and to see his evolution, this way to know his tendency, so much as for the quotation as the benefits. We must bear in mind that we work on future forecasts, and an important element is to do projections from the past.
- The factor time in the benefits
It is probably, the factor that more it can affect to the calculation of the PER. Especially, because we have to determine if the benefits that we take are the obtained last ones, or a few forecasts of future benefits. But from the moment in which the factor time intervenes, we can slant the results, since it can be that change the business cycle, and the one that has taken a few past benefits, it does not mean that they are fulfilled to the following exercise. For his part, if we take the benefits estimated for the following exercise, these do not stop being that, an estimation that also can be erroneous.
This is one of the motives that produce so many changes in the quotations when finally the real results of the companies are known: the deviation that has taken place between the due finally obtained results and, and, therefore, the adjustment of the PER.
Let's suppose a PER of 10 for a few due benefits of 2 €. Then, the quotation of this action, fitting to these benefits, should be 20 € (PER x due net profits). Nevertheless, if finally we know that this benefit, instead of 2 it has been 2,2 €, the quotation should cost really 22 €, and the value would fit. That, obviously, would be on a perfect market, but it serves to illustrate the movement that can produce the results publication, and the use of a ratio as it it is the PER.
- To complement it with other indicators
The market is imperfect. Not always it has why the theory is fulfilled, and much less in the short term. The PER is an indicator that we must cite as an example of our long-term investments. It is much surer than invirtamos in companies with a low PER (with regard to his sector) that in companies with an excessively high PER, which contain more risk. But that does not mean, that we gain with entire safety for investing in these companies.
As always, the best thing, it is to complement the observation of the PER with other indicators of similar court.
- To do a trackback to this article, it uses this linkage
- To continue the comments of this article for RSS, it uses this linkage
- There are no comments yet...
We want to put the economic and financial actuality within reach of your hand, with a simple and direct language, so that we all could comprise it. The real estate market, the Stock Exchange, the different options to invest, you count and bank deposits... So that you know what to do with your money.
- Spain is the country with more deflation risk
- The slowness in maxima for 12 years
- Housing, it continues the collapse
- Movements to receive deposits
- The Euribor keeps on beating descent records
- Week of breather and increases in Stock Exchange
- SICAV, an alternative of investment
- The unknown side of the mortgages in Spain
- Loans 2.0, credit between individuals
- Price war in the feeding
- It continues the fall of the interest rates and the Stock Exchange
- Measurements of the government against the unemployment, without consensus
- The bank crisis in Stock Exchange
- The unemployment in Spain and the bad economic management
- The economic crisis generates opportunities
- The labor calendar of 2009
- TAE, meaning and calculation
- Interprofessional minimum wage 2009 and minimal pensions
- The IPC of the rents: calculation and update
- Forecasts of the Euribor for 2009
- The best deposits of January, 2009
- The Euribor: calculation and meaning
- Evolution of the interest rates and his consequences
- Where to put the money in epochs of crisis
- Pension plans 2008 of the Santander