What is PER? How is it calculated? An explanation of PER that even newbies can understand.

In stock investment, "PER (Price Earnings Ratio) is one of the most important indicators". Securities analysts frequently refer to a company's past PER and current stock price, discussing the appropriate level of the stock price.

In this article, we will comprehensively explain the definition, uses, and implications of PER.

What is PER?

PER stands for Price-to-Earnings Ratio, which translates to stock price earnings ratio in Japanese.

This indicator shows how many years of profit correspond to the stock price. Therefore, it is often used to evaluate whether a company's stock price is overvalued or undervalued.

For example, if Sony's P/E ratio is currently about 15, it means that it would take 15 years to earn its current market capitalization, and also suggests that if you purchase the stock, you would be able to recover your investment in 15 years.

How to Calculate PER

There are mainly two methods for calculating PER. One is to divide the stock price by the earnings per share (EPS), and the other is to divide the market capitalization by the net profit attributable to ordinary shareholders for the current period. Usually, the former method is used.

For example, if Sony's (6758.T) current stock price is ¥12,000 and the EPS for the fiscal year 2022 is ¥800, then the PER = 12,000 / 800 = 15.

Types of PER

Depending on how EPS is calculated, PER can be classified into historical PER and forecast PER. Furthermore, historical PER can be further divided into static PER and most recent four quarters PER.

Types of PER: ◆ Past PER: Static PER & Recent 4 Quarters PER ◆ Expected PER

What is static PER (past PER)?

Static PER Calculation Formula: PER = Stock Price / Annual EPS

Annual EPS is usually disclosed when a company announces its annual financial results. It can also be calculated by summing the EPS of the previous four quarters.

For example, Sony's EPS for the fiscal year 2022 = Q1EPS + Q2EPS + Q3EPS + Q4EPS = 200 + 220 + 180 + 200 = 800 yen.

Annual EPS is fixed until the new annual report is published, so fluctuations in PER are solely due to changes in stock price. Therefore, this metric is referred to as static PER.

What is the recent 4-quarter PER (past PER)?

The latest four-quarter PER is also referred to as the TTM (Trailing Twelve Months) PER and is calculated based on the most recent 12 months. However, since publicly listed companies announce their earnings quarterly, the PER is actually calculated using the EPS from the latest four quarters.

Formula: PER (TTM) = Stock Price / Total EPS of the Latest 4 Quarters

For example, if Sony announces an EPS of 150 yen for Q1 2023, the total EPS for the latest four quarters would be as follows:

22Q2EPS + 22Q3EPS + 22Q4EPS + 23Q1EPS = 220 + 180 + 200 + 150 = 750 yen

PER (TTM) = 12,000 / 750 = 16

When the new EPS is announced, it can be seen that the static PER remains at 15, while the most recent four-quarter PER changes to 16.

What is the expected PER (dynamic PER)?

The expected PER, also known as dynamic PER, is calculated using the expected EPS.

Formula: PER = Stock Price / Expected Annual EPS

For example, if an analyst predicts Sony's EPS for the fiscal year 2023 to be 700 yen, the dynamic PER would be 12,000 / 700 = 17.1.

However, the expected EPS from each institution varies, and companies themselves tend to overestimate or underestimate their EPS forecasts, which may confuse investors and reduce the practicality of this indicator.

To deepen understanding, I have summarized the following:

Type Subclassification Formula Features Past PER Static PER Stock Price/Annual EPS High latency Latest 4 Quarter PER Stock Price / Latest Total EPS for 4 Quarters Overcoming latency, but unable to reflect the future. expected PER Dynamic PER Stock Price / Estimated Annual EPS It can reflect the future, but lacks accuracy.

What is an appropriate PER?

When looking at a company's PER, there are mainly two ways to determine whether it is appropriate. One is to compare it with other companies in the same industry, and the other is to compare it with the company's past.

Comparison with competitors

The level of PER varies across different industries. For example, in February 2023, the sector-specific PER on the Tokyo Stock Exchange showed that the automotive industry had the highest PER at 98.3, while the shipping industry had the lowest at 1.8. Clearly, it is not appropriate to compare companies from these two industries.

Therefore, the comparison of PER should be made among companies in the same industry, and it is preferable to choose companies with similar business activities. Taking Sony (6758.T) as an example, it can be compared with Panasonic (6752.T) or Hitachi (6501.T).

As of now (2025/10/11), Sony's PER is 15, Panasonic's PER is 10, and Hitachi's PER is 18. Sony's PER is positioned between these two companies, and it can be said that it is relatively not high.

Comparison with the past of the same company

By comparing the current PER with past PERs, it is possible to determine the high or low valuation of a company.

Taking Sony (6758.T) as an example, the current PER is 15, which is lower than 90% of the PER over the past five years, indicating that the current corporate valuation is relatively undervalued.

Method of Stock Investment Using PER

PER chart

By using PER, we can determine whether a company's stock price is appropriate. So, is there a simple way to intuitively understand whether the stock price is overvalued or undervalued?

Yes. That is the PER chart.

The PER chart is a tool that visually indicates whether stock prices are overvalued or undervalued. Typically, 5 to 6 lines are displayed on the stock price chart, and each line is calculated using the following formula: stock price = EPS × PER.

The highest line represents the stock price calculated using the highest historical PER, while the lowest line represents the stock price calculated using the lowest historical PER.

Looking at the chart above, it can be seen that the stock price of Sony is approaching the lowest line.

This usually indicates a good buying opportunity, but caution is necessary. This does not necessarily mean that a profit will be made after purchase. After all, there are many factors that influence stock price fluctuations.

The relationship between PER and stock prices

There is no inevitable relationship between PER and the rise and fall of stock prices.

In other words, low PER stocks do not necessarily rise in the future, nor do high PER stocks necessarily fall in the future.

Investors give high evaluations to stocks because they expect the company's future development. Therefore, even though many technology stocks have very high P/E ratios, we can see that their stock prices continue to rise.

Disadvantages, Limitations, and Precautions of PER

The PER is a common indicator of evaluation, but it has several limitations. There are mainly three points:

1. Not considering the impact of liabilities

The value of a company is the total of its shareholders' equity and liabilities, but the calculation of PER considers only the value of shareholders' equity and does not take into account the company's liabilities. Even if the PER is the same, the actual risk differs between companies with low liabilities and those with high liabilities.

In the same industry, if Company A is earning profits from its own assets while Company B is earning profits from investments financed by borrowed funds, the risks they face when confronted with economic fluctuations or changes in market interest rates will be different. Therefore, if the EPS is the same, Company A usually has a higher stock price than Company B. In this case, it cannot simply be said that Company B is undervalued. This is because Company A is considered safer.

It is difficult to accurately define the high and low of 2.PER.

The reason for the high PER may be that the company is facing temporary headwinds and is experiencing a significant decrease in profits, but there are no issues with the company's fundamental strength, and the market may still be trying to hold on to the company's stock.

Additionally, while the future profit growth of companies may look good this year, it may appear more reasonable next year or the year after. Therefore, there is a possibility that market buyers are trying to enter early. Of course, there may also be cases where it has simply overheated and a sell-off adjustment is necessary.

These situations vary depending on the company in question, making it difficult to simply judge whether the PER is high or low based solely on past experiences.

3.PER cannot evaluate companies that are not making a profit.

Many startups and biotechnology companies are not making profits, so they cannot be evaluated using the PER (Price Earnings Ratio). In such cases, other indicators are used for assessment, such as the PBR (Price to Book Ratio) and PSR (Price to Sales Ratio).

Differences between PER, PBR, and PSR

Below is a summary of the differences between PER, PBR, and PSR:

Indicator Japanese Name Formula How to use Applicable Companies PER Price Earnings Ratio

1. Stock Price/EPS
2. Market Capitalization / Net Profit The higher the PER, the more overvalued the stock price. A company with stable profits PBR Price-to-Book Ratio
3. Stock Price/BPS
4. Market Capitalization/Shareholder Equity PBR<1 The stock price is undervalued PBR>1 Stock price is overvalued Cyclical business PSR Price-to-sales ratio
5. Stock Price / Revenue per Share
6. Market Capitalization/Sales The higher the PSR, the more overvalued the stock price. companies that have not yet made a profit

Once you understand the concept and calculation method of PER, you can appropriately apply it to your investments and find stocks that match your investment goals for buying and selling. CFDs provide opportunities to profit from two-way trading of stocks as a form of investment transaction, offering many advantages compared to traditional financial products, allowing you to trade anytime and anywhere.

Frequently Asked Questions

How do you calculate the appropriate PER for a company?

The most challenging aspect of accurately predicting a company's appropriate PER is estimating profits. Even if a company's profits this year are very high, if there is a possibility that they will significantly decrease next year, the stock price may start to decline early. In this case, the PER may appear undervalued at first glance, but in comparison to next year's profits, it could be at a very reasonable level. Conversely, if a company's stock price suddenly rises significantly, it is possible that other investors are aware of a major turning point for the company next year in advance. Therefore, when calculating a company's PER, we typically refer to the following three data points: the PER of the company during the same period based on historical market interest rates, the PER of current competitors in the same industry, and the future outlook for the company's sector. Based on these three circumstances, we estimate the company's appropriate PER and evaluate whether the current stock price is overvalued or undervalued, thus formulating a suitable investment strategy.

Are companies with low PER relatively safe?

If a company's profits are stable, a low PER is certainly safer. However, if a company's profits fluctuate significantly, a low PER is not necessarily safe. Nevertheless, relatively speaking, it can be said that the risk is lower than that of companies with a high PER.