The Compass of Stock Investment: Understanding PER!

For novice investors starting out in stock investing, there's a term you've probably heard of: PER. PER stands for Price-to-Earnings Ratio, an important indicator of whether a company's stock price is expensive or cheap.

What is PER?

PER is the value obtained by dividing the stock price by the earnings per share. Simply put, it shows how many times the amount an investor pays for one share is the amount of profit that stock earns in one year.

PER = Stock Price ÷ Earnings Per Share

Example: If a company's stock price is \u00A210,000 and its earnings per share are \u00A21,000, the PER is 10 times. This means that an investor pays 10 times the amount of profit earned in one year to buy one share of this company's stock.

Why is PER important?

PER is used to evaluate the relative value of a company. A low PER means that the stock price is likely undervalued, while a high PER means that the stock price is likely overvalued.

• When PER is low:It is generally considered an undervalued company and can be considered as an investment opportunity. However, the reason for the undervaluation must be carefully examined. (e.g., poor business conditions, lack of future growth potential, etc.)
• When PER is high:It is generally considered an overvalued company and investment should be carefully considered. However, if it is a company with high growth potential, a high PER can be justified.

Investment Strategy Using PER

PER should be judged comprehensively with other indicators rather than used alone.

• PBR (Price-to-Book Ratio):This is an indicator that shows the stock price relative to the company's assets. Using it along with PER allows for a more accurate understanding of the company's financial status.
• ROE (Return on Equity):This is an indicator that shows net profit relative to capital. It is used to evaluate a company's profitability.
• Growth Potential:This is an indicator that shows the potential for future profit growth of a company. High-growth companies can justify a high PER.
• Industry Average PER:By comparing with the average PER of the industry, it is possible to judge whether it is relatively undervalued or overvalued.

Disadvantages and Precautions of PER

• Based on Past Data:Since PER is calculated based on past performance, it may not accurately reflect future growth potential.
• Industry Characteristics: The appropriate PER level varies depending on the industry, making simple comparisons difficult.
• Economic Fluctuations:PER can fluctuate depending on economic trends.
• No Absolute Standard:A high or low PER does not necessarily mean a good investment opportunity.

Conclusion

PER is a useful indicator in stock investment, but it is not an absolute standard. It's necessary to comprehensively analyze various indicators, including PER, and consider the company's business model, competitive advantage, and future growth potential to make investment decisions.

Investment always involves risk. Gathering sufficient information before investing and seeking professional help is also a good approach.