2) Fundamental Analysis

What is PER

PER is one of the most popular ratios in the investment world. Almost every investor -- from beginners to Warren Buffett -- checks PER when evaluating stocks. But what does it mean, and how do you use it correctly?

Definition

PER (Price to Earnings Ratio) is a ratio comparing stock price to earnings per share (EPS). Simply put, PER shows how many times the stock price is relative to the company's per-share profit. A PER of 15x means you're paying 15 times the company's annual earnings.

Simple Explanation (Analogy)

PER is like buying an existing business. Shop A earns $10,000/year and is sold for $100,000. Its PER is 10x, meaning 10 years to break even (if profits stay stable). Shop B also earns $10,000 but sells for $200,000. Its PER is 20x -- 20 years to break even. Which is more attractive? Depends on the shop's growth prospects!

Indonesian Stock Example

Indonesian banking stocks typically have PER of 10-15x. Premium BBCA can have PER of 20-25x due to consistent growth. Meanwhile, commodity stocks like ADRO (Adaro Energy) might show very low PER (5-8x) when coal prices are high, but that's because the market knows commodity profits are cyclical -- they won't always be that high.

How to Use

Compare a stock's PER with its sector average PER. A PER of 20x for a consumer goods stock might be normal, but for a coal mining stock, it could mean overvalued.
Look at forward PER (based on next year's estimated earnings), not just trailing PER (based on last year's earnings). Rapidly growing companies usually have lower forward PER than trailing PER.
Combine PER with earnings growth. A PER of 30x with 40% annual earnings growth might still be fair. A PER of 15x with 10% declining earnings could actually be overvalued.

Common Mistakes

Seeing a low PER and buying immediately. A low PER could mean the company is poor quality, earnings are declining, or the business is dying. This is called a 'value trap.'
Comparing PER across different sectors. A tech company's PER (usually high) can't be equated with a utility company's PER (usually low).
Relying on PER alone without checking other ratios. PER is just one puzzle piece. Combine it with PBV, ROE, DER, and earnings growth for a more complete picture.

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FAQ

What PER is considered cheap?

Generally, PER below 10x is often considered cheap, 10-20x is fair, and above 20x is expensive. But this is very relative depending on the sector and company growth. A PER of 25x for a company growing 30%/year can be cheaper than a PER of 10x for a company with stagnant earnings.

Why do some stocks have negative PER?

Negative PER means the company is losing money (EPS is negative). This commonly happens with startups or companies going through tough times. Negative PER can't be used for valuation -- you need other methods like Price to Sales (P/S) or DCF.