I just read a quite interesting analysis about one of the indicators we ignore the most when we start investing. It’s about the PER, that ratio that shows up everywhere but that few people really understand well. So I decided to look a bit deeper into the topic.

Basically, the PER tells us how many times the company’s annual profit is reflected in its market capitalization. In other words, if a company has a PER of 15, it means that its current profits would take 15 years to match what the company is worth today on the stock market. That is, it’s the PER of a stock divided by earnings per share. Simple, right?

What’s interesting is that the PER works in very different ways depending on the context. I was looking at the case of Meta (Facebook) a few years ago: while the PER kept dropping, the stock was going up. That indicated that the company was generating more and more profits. But at the end of 2022, things changed. The PER kept falling, but the price was also dropping. Why? Because the FED raised interest rates, which especially affected technology stocks, regardless of their fundamentals.

Now, calculating the PER is pretty straightforward. You have two options: divide the market capitalization by the total net profit, or divide the stock price by earnings per share. Either way gives you the same result. The information is everywhere, so anyone can do it in 30 seconds.

What many people don’t know is that there are variants of the PER that produce different results. There’s Shiller’s PER, for example, which instead of taking only the profits from a single year, takes the average of the last 10 years adjusted for inflation. The idea is that one year can be anomalous, but 10 years give you a more realistic view. There’s also the normalized PER, which adjusts for debt and liquid assets, giving you a more accurate picture of the company’s true financial health.

So what does a high or low PER mean? This is where people get confused. A PER between 10 and 17 is usually considered optimal, suggesting growth without overvaluation. Less than 10 can be attractive, but it can also be a sign of future problems. More than 25 can be an opportunity or a bubble—it depends a lot on the sector.

And here comes the crucial point: the PER varies enormously by sector. Technology or biotech companies have very high PERs (I’ve seen Zoom with a PER of 200+), while banks and the metallurgical industry are around PERs of 2–3. Comparing a tech company with a miner using only PER is like comparing oranges with apples.

That also means the stock’s PER allows you to compare companies without depending on whether they pay dividends or not, something other ratios don’t do. But here’s the warning: the PER alone is useless. You need to combine it with EPS, ROE, ROA, P/VC, and a serious analysis of the company’s real numbers. I’ve seen companies with very low PERs because they were about to go bankrupt—not because they were good opportunities.

The truth is that the PER is a practical tool and easy to obtain, but it’s only one piece of the puzzle. If you base your investment solely on the PER, you’re going to run into problems. What works is using it as a first filter, then digging into the business, its prospects, its management, and the company’s real figures. That said, dedicate at least 10 minutes to understanding what’s behind those numbers before investing.