Price Earning Ratio : Definition, Purpose, and How to Calculate It

If you are currently studying various stock instruments, then one of the sciences that you must explore and learn is Price Earning Ratio or PER.

Basically, the Price Earning Ratio is a financial ratio that can help you choose the right stock instrument. By understanding and studying PER, it will help you in choosing the right type of stock. This will increase the return on your investment.

So, what is PER? What is the function of PER? And what is the importance of PER for investors? Get the answer by reading the article on PER below.


1 Pengertian PER (Price Earning Ratio)
2 Tujuan Price Earning Ratio

2.1 1. Evaluating Prospective Investments
2.2 2. Assisting Investors in Making Decisions
2.3 3. Estimating the Market Value of a Stock
3 Pentingnya Price Earning Ratio
Ways to Calculate Price Earning Ratio
Tips for Making Investment Decisions Through PER

Understanding PER ( Price Earning Ratio )

Sourced from the Corporate Finance Institute page, the price earning ratio is a picture related to the company’s stock price and also the profit or profit that the company is able to generate. The profit value of this company is generally referred to as earnings per share or EPS.

This ratio is basically a ratio that is very well known and widely used by analysts and investors in understanding the value of shares in a company.

In fact, PER is often used as a consideration in buying shares from one company to another, especially for the same industry.

Based on the Investopedia page, if the Price Earning Ratio in a company is of high value, then the stock also has a high value. Conversely, if the company is not earning or experiencing losses, then the Price Earning Ratio is zero.

For that, for those of you who want to jump directly into the world of stocks, it’s a good idea for you to study this one financial ratio. Don’t just jump into the world of stocks and don’t know fundamental analysis.

Price Earning Ratio

1. Evaluating Prospective Investments

From time to time, it seems that stocks have become increasingly popular among the public. The term stock today is no longer foreign to the ears of ordinary people. Stocks are known as a good source of investment for the future.

Generally, shares are issued by a company for various purposes, but the main purpose is to be able to seek additional capital from investors.

By calculating the value of the Price Earning Ratio, then you can find out more clearly whether stocks can be a profitable investment instrument for you in the future or not. In addition, you can also understand the profit and stock conditions of the company by assessing PER.

2. Helping Investors in Making Decisions

Of course, every investor will consider various steps in making various decisions regarding buying shares or not. Because, every investor will usually see the prospect of future stock profits related to the benefits or disadvantages for these investors.

But behind all of this, there is a Price Earning Ratio method that can be the basis for making investment decisions. Every investor can study the prospects for the company’s shares in the future and this can be taken into consideration for these investors in making decisions.

3. Estimating the Market Value of a Stock

We must know the market value of shares in buying and selling shares. If you are an entrepreneur and want to sell your company stock, then you should be able to do a market assessment. It is the same with investors who must know the value of a market.

The calculation of the Price Earning Ratio has a very important role so that the market perception of a stock can be clearly identified. Conditions related to the rise or fall of a stock will be able to describe the condition of the company and can be used as a basis for making decisions for investors.

The Importance of Price Earning Ratio

Up to this point, of course you already understand about PER. PER is indeed needed for companies that want to sell their shares.

Now, because the Price Earning Ratio is important for companies or investors, the calculation between company income and stock prices is an important thing to assess and also know more clearly and in detail.

By knowing the ratio of the value of earnings to shares in a company, you can assess the level of stability of the company itself.

How to Calculate Price Earning Ratio

When calculating the Price Earning Ratio value, you must involve two main components, namely the closing price or price per share, and earnings per share (EPS). Based on these two components, the following formula is obtained:

PER = Closing Price: EPS

For an example of the calculation, let’s say there are companies PT ABC and PT XYZ that operate in the same sector and have different share prices per share and EPS. PT ABC has a closing price of Rp. 60,000. Meanwhile, the closing price of PT XYZ is IDR 2,200.

Then, the EPS ratio at PT ABC for one year is Rp. 4,000, while the EPS ratio of PT. XYZ is only Rp. 100.

Based on the example above, the PER calculation for PT ABC and PT XYZ is as follows:

PER PT ABC = IDR 60,000 : IDR 4,000 = 15

PER PT XYZ = Rp 2.200 : Rp 100 = 22

Based on the results of the above calculations, we can see that the PER of PT ABC is lower than that of PT XYZ.

For another example, let’s say that PT Suci Berkah Utama issued a price per share of IDR 10,000 with an EPS ratio of IDR 20. Based on this data, the Price Earning Ratio is as follows:

PER PT Suci Berkah Utama = IDR 10,000 : IDR 20 = IDR 400

The value of the Price Earning Ratio which is Rp. 400 above shows that each investor can pay Rp. 400 for every Rp. 1 of the turnover or income earned by the company.

Tips for Making Investment Decisions Through PER

At this time, we already know the formula for calculating PER and examples of calculating it. Then, what kind of stocks are profitable? Is it a stock with a high PER value or a low one?

As we mentioned earlier, stocks with a high PER value can be ascertained by the high value of the shares of the company and will experience development.

Most investors will choose to invest in companies with a high PER value. However, if the PER value is too high, then the potential volatility value is also high and indicates that the stock is overvalued or too high.

On the other hand, based on the Corporate Finance Institute website, stocks with the low price earning ratio values ​​will be claimed as value stocks. This means that the price of the shares traded is lower than the market price.

So, every investor can buy the stock before the capital market starts to reassess the stock price. In addition, the value stock also has the potential to obtain high fundamental values ​​in the future.


There are at least three conclusions from the discussion of this price-earning ratio. First, in investing, it is better to choose a company that has a good business even though the value of the price earning ratio is not too low.

You can rely on the ideal standard PER value. If in a crisis condition, the PER value of 15 is enough to promise high profits.

Second, everyone has different views regarding the price earning ratio in a company. Everything will depend on the stimulus received, the individual’s psychology, and also his financial condition.

Third, the individual’s perception of a business entity with the value of the price earning ratio will also be influenced by the company’s performance, the information received, and the expectations of the individual.

This is our complete explanation of PER as one of the financial ratios that can influence the decisions of potential investors.

However, as an investor you also need a good financial strategy. This strategy can be made if you have precise and accurate financial reports.

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