PER: The Misunderstood Market Metric That Rules Your Investment Returns

Ever looked at a stock and wondered if you're getting proper bang for your buck? That's where PER swoops in - though I'm constantly amazed how many punters ignore this crucial number while chucking their money at whatever's trendy this week.

As someone who's watched far too many mates get burnt by ignoring basic metrics, I'll tell you straight: Price-to-Earnings Ratio might sound dull, but it's bloody essential to separate the bargains from the ripoffs.

What the Hell is PER Anyway?

Simply put, PER (or PE if you prefer) is what us market watchers use to determine how many years of company profits you're paying for when buying shares. Some call it market-to-earnings ratio here in Britain.

Take Taiwan Semi, for instance. With a PER around 13, you're essentially willing to wait 13 bloody years to recoup your investment through earnings. Seems a long wait, doesn't it? But compared to some tech firms with PERs north of 100, it's practically instant gratification!

Calculating PER - Simple Maths Even Your Gran Could Do

There are two ways to calculate it:

1. Share price ÷ Earnings per share (EPS)
2. Company market cap ÷ Net profit

Most of us use the first method because it's simpler. If Taiwan Semi trades at 520 quid and makes 39.2 per share, the PER is 13.3. Not rocket science, is it?

Different Flavours of PER

Now here's where it gets interesting - or confusing, depending on how many pints you've had:

Historical PER

• Static PER: Uses last year's annual EPS
• Rolling PER (TTM): Uses the latest four quarters' worth of earnings

Forecast PER

• Forward PER: Based on estimated future earnings (essentially a guess)

The historical ones tell you what's happened, while the forward one tries to predict the future. And we all know how reliable predictions are - about as trustworthy as a politician's promise!

What's a "Good" PER Then?

Here's the rub - there's no universal answer. What's good for banking is rubbish for tech. In Taiwan's stock market, automotive PERs hit 98.3 while shipping companies sat at a measly 1.8. Comparing them is like judging a fish on its ability to climb trees.

Instead, you need to:

1. Compare within the same industry
2. Compare against the company's own history

Taiwan Semi's 13 sits between United Micro's 8 and some other semiconductor firm's 47. Not too shabby. More importantly, it's lower than 90% of its own PERs over the past five years. That suggests it might actually be decent value.

Using PER Without Being a Muppet About It

The PER river chart is quite clever - it shows whether a stock is trading closer to its historically high or low PER. When it's near the bottom bands, like Taiwan Semi is now, you might be getting a bargain.

But don't be daft - low PER doesn't guarantee the price will rise! Some high-PER tech firms keep soaring while seemingly "cheap" stocks continue sinking. The market's not always rational, you know.

The Dirty Little Secrets About PER

For all its usefulness, PER has some serious flaws:

1. Ignores debt completely - A debt-laden firm with the same PER as a cash-rich one is hardly equivalent, is it?

2. Context is everything - High PER might mean temporary earnings dip or amazing growth potential. Low PER could signal either a bargain or a firm circling the drain.

3. Useless for companies without profits - Try calculating PER for a startup with negative earnings. Go on, I'll wait.

PER vs Other Valuation Methods

When PER fails you, there's always price-to-book (PB) and price-to-sales (PS):

• PB works better for cyclical companies with tangible assets
• PS is handy for those not-yet-profitable firms that would break your PER calculator

The Bottom Line

I've watched too many investors obsess over finding the "perfect" PER while ignoring everything else. That's like judging a potential date solely on their height.

PER is just one tool in your kit. Use it wisely, combine it with other metrics, and for heaven's sake, understand what you're buying. The market can stay irrational longer than you can stay solvent - and that's a fact that's cost me more than a few quid over the years!

Don't be the mug buying solely on PER numbers. The savviest investors I know use PER as a starting point, not the entire strategy. After all, the current market could care less about your spreadsheet calculations when sentiment shifts.