PER (Price to earnings ratio): meaning, formula and how to read its ranges

Formula

PER = market cap ÷ annual net income = price ÷ earnings per share (EPS)

For example, a company with a market cap of KRW 1 trillion and annual net income of KRW 100 billion has a PER of 10.

Definition

PER (price to earnings ratio) is a company's market cap divided by its annual net income. On a per-share basis it is the same as the share price divided by earnings per share (EPS). Put simply, it answers one question: if the whole company were acquired at today's price and kept earning as it does now, how many years of profit would it take to recover the money? A PER of 10 means that, in theory, ten years of profit equal the company's current price.

That makes PER the standard valuation metric for judging whether a share price is high or low with earnings as the yardstick. When two companies in the same sector earn similar amounts, the one with the lower PER is read as carrying a lower price for each unit of earnings.

For Korean stocks, the PER Jupick shows is market cap divided by the annual net income in the annual report filed on DART, Korea's electronic disclosure system. For overseas stocks it is the value the data source calculates over the trailing 12 months. PER is not a measure of a company's financial strength but a price metric that shows how much the market is paying for those earnings, so Jupick leaves it out of the overall grade (profitability, stability and dividends) and shows it separately.

How to read it

In general, a lower PER is read as a share price that is low relative to earnings. There is no fixed answer to how low counts as low, though. The often-quoted line of around 10 moves with the period and the sector, so checking where the current market median sits is more accurate than relying on a memorized number.

In fast-growing sectors (semiconductor equipment, internet, biotech and so on), expectations of larger future earnings are already reflected in the price and PER can reach several tens, while in sectors with slow growth but steady earnings (banks, telecoms, utilities) a single-digit PER is natural. Whether a PER is high or low only means something when compared within the same sector and against the company's own historical average.

In Jupick's strengths and weaknesses summary, a PER of 10 or below is generally labeled “Share price is low relative to earnings” and 40 or above “Share price is high relative to earnings”. These are reference ranges, not absolute verdicts of good or bad.

PER across the market now

The values that fall at each point when the stocks Jupick covers are lined up by PER, smallest to largest. Positions in the line are used instead of an average because a few unusually large values can drag a single average a long way.

KoreaBased on 167 stocks

Quartile values of PER for 167 Korean stocks
Lowest 25%	Middle	Highest 25%
10.6x	20.5x	50.0x

Smallest value 2.2x, largest value 17483.9x

Of the major Korean stocks, only 167 made it into this table. Left out: 33 stocks with no value from the source.

OverseasBased on 197 stocks

Quartile values of PER for 197 overseas stocks
Lowest 25%	Middle	Highest 25%
17.5x	25.0x	35.3x

Smallest value 4.7x, largest value 987.0x

Of the major overseas stocks, only 197 made it into this table. Left out: 2 stocks with no value from the source.

Stocks are rarely left out at random. Companies for which a metric does not hold, or for which the source gives no value, tend to be the ones in weaker shape, so the stocks left in the table are the ones in better condition. The middle value of such a table leans to the favorable side compared with the whole market, and the more stocks are left out, the more it leans.

Lowest 25%: The quarter of stocks priced lowest relative to earnings. The market is not paying much for this company's profit, either because it is underrating the company or because it is worried that earnings are about to shrink. This number alone does not say which.
Middle half: The price relative to earnings sits in the common range for the market. This band is wide, and its upper and lower ends differ quite a bit in character, so where the company stands against others in the same sector is more useful than the fact that it falls in this band.
Highest 25%: The quarter of stocks priced highest relative to earnings. Growth expectations are often already built into the price, but the band also includes companies whose multiple grew only because earnings shrank for a while and made the denominator small.

The two values at either end of the table above are the boundaries that split the stocks into three groups. What it means to belong to each group is written above.

Two stocks that fall just either side of a boundary have practically the same value. Being in different groups does not by itself make them different. The boundaries are drawn again from each day’s sample, so a company can change groups even when nothing about it has changed.

Lowest and highest describe the order of size only, not good or bad. The data is updated once a day.

Stocks with a low PER now

Stocks on Jupick's watchlist with a computable PER (profitable companies), sorted from the lowest.

Points to watch

PER means nothing for loss-making companies. When net income is zero or negative, the ratio either cannot be calculated or turns negative, and showing “no PER” is the normal result.
One-off gains need watching. When a one-time gain, such as the disposal of real estate or of a stake in a subsidiary, is mixed into net income, PER can look low for a while. A one-off loss does the opposite and inflates PER.
PER is based on earnings from a period that has already passed, so it does not capture changes in future results. A low PER is not always a low price for the business; it can also be a sign that the market is worried about falling earnings (the so-called value trap).
Simple comparisons with overseas companies that use different accounting standards or fiscal year-ends can be distorted.