The same price means different things depending on what you compare it to.

Assume a hypothetical company with a stock price of 50 dollars, 10,000,000 common shares, annual earnings attributable to common shareholders of 25,000,000 dollars, revenue of 500,000,000 dollars, and ending common equity of 200,000,000 dollars. Simplify by assuming the number of shares remains constant during the period and there are no preferred shares or dilution effects. The market capitalization is 500,000,000 dollars.

PER: How much are you paying for 1 dollar of earnings?

A PER of 20x means that for every 1 dollar of earnings, the stock price is 20 dollars based on the earnings used. It does not mean you are guaranteed to recover your principal in 20 years, as future earnings, dividends, and stock prices are not fixed.

Trailing or TTM often uses performance from the last 12 months, while Forward uses projected future earnings. If the forward EPS decreases, the forward PER increases even if the stock price remains the same. When a company is in a deficit, a negative PER or N/M is not an indication that it is “cheaper.” If earnings are close to 0, the multiple also becomes extremely large. High earnings at the peak of a business cycle or gains from asset sales can also result in a low PER.

PSR: Also look at the extent to which revenue remains as profit.

Even for loss-making companies, you can calculate PSR if there is revenue. However, a company that earns 100 in revenue and keeps 2 is not necessarily worth the same as one that keeps 30 just because they have the same PSR. Consider growth rates, gross margins, cash burn, and the possibility of additional capital raises.

Whether revenue recognition is on a gross or net basis also affects comparisons. Do not mistake a platform's gross merchandise value for the company's revenue. When comparing companies with different levels of debt, PSR, which only uses market capitalization, may not sufficiently reflect the debt burden.

PBR: Book value of net assets is not the liquidation price.

A PBR of less than 1x does not guarantee a profit upon liquidation. The book value of inventory, real estate, and goodwill may differ from actual disposal value, and hidden losses or low profitability may be reflected in the price.

Simple comparisons are difficult between companies with significant tangible assets and those whose self-developed technology or brands are not fully captured on the balance sheet. PBR can rise if equity decreases due to share buybacks, and if equity is 0 or less due to capital impairment, standard PBR interpretation breaks down.

Do not determine the fair stock price based on a single multiple.

First, select companies in the same industry with similar business models and adjust for growth, margins, debt, and accounting standards. Then, compare them to their own historical ranges, while also checking if interest rates or business structures have changed. Being lower than the average is just a starting point for further investigation.

EV is a concept of enterprise value that reflects net debt and other factors in addition to equity value. EV/Revenue and EV/EBITDA complement capital structure comparisons, but EBITDA is not cash flow that reflects capital expenditures, taxes, and principal repayments. There is no fixed “good PER” number that applies to all industries.

Check what you have read.

• Is it TTM or an estimate?
• Is it a company with a deficit or capital impairment?
• Did you compare it with a similar industry?
• Have you also looked at growth rates, margins, and debt?

Apply what you read to the actual screen

Try it on WAPE

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