A while back, I was reviewing how I select my investments and I realized something: most serious traders always talk about the PER, but many don’t even understand what it really is or how to interpret it. So I decided to dig deeper into it because, honestly, it’s one of those indicators you can’t ignore if you want to do decent fundamental analysis.

The PER, or Price/Earnings Ratio, basically tells you how many times a company’s profit is reflected in its stock valuation. In simpler terms: it’s the relationship between what a share costs and what the company earns. If a company has a PER of 15, that means it would take 15 years of current profits to pay for what it’s worth on the stock market today. It sounds strange at first, but it’s a fundamental data point.

What’s interesting is that the PER doesn’t always work the same way. I remember when Facebook (now Meta) had a PER that kept falling while the price was rising. That was a sign they were earning more and more money. But starting in late 2022, everything changed. The price fell even though the PER fell even more. Why? The FED was raising interest rates, and that hit tech companies. The PER doesn’t explain everything.

To calculate it, you have two options: divide market capitalization by net profit, or use the stock price divided by earnings per share (BPA). Both give you the same result. The advantage is that the data is available on any financial platform, so it’s not complicated to do it yourself.

Now, here’s the important part: interpretation. A PER between 10 and 17 is usually considered optimal because it suggests growth without excesses. Less than 10 can mean it’s cheap, but it can also be a sign that profits are going to fall. More than 25 is a bubble risk or very high expectations. But here’s the trick: it all depends on the sector. Tech companies naturally have very high PERs (Zoom reached 200+), while banking or heavy industry operates with low PERs (Arcelor Mittal is around 2.5). You can’t compare a bank with a tech startup using the same criterion.

There’s also Shiller’s PER, a more conservative variant. Instead of using one year’s earnings, it takes the average of the last 10 years, adjusted for inflation. The idea is to get a less volatile and more realistic view. Some people see it as more reliable, while others criticize it just like the normal PER.

What I learned after analyzing this is that the PER alone tells you nothing. You need to combine it with other metrics: ROE, ROA, the Price/Book Value ratio, Free Cash Flow. I know many investors who look only at the PER and end up buying companies that look cheap but are close to going bankrupt. A low PER can be a trap if you don’t understand why it’s low.

One thing I notice is that value investing funds depend heavily on the PER because their philosophy is to find good companies at a good price. That makes sense. But even they know they need to look beyond the number.

The reality is that the PER is a useful, practical, and easy-to-obtain tool—especially when you’re comparing companies within the same sector and geography. But an investment based solely on this will never work. I’ve seen companies with excellent PERs go bankrupt because management was disastrous. So my advice is: use it, but combine it with a deeper analysis of the numbers, the industry, and the macroeconomic context. Spend time truly understanding what the company does—don’t just look at a ratio and decide. That’s what separates serious investors from those who lose money quickly.