PER as a Performance MeasureThe most common way to value a company is by using its profit. In this case, we use the net profit, which is the remaining fund after the company pays all of its expenses. To see the ratio relevantly, the usual measure is the earning per share (EPS).
EPS is gained from the division of net profit with the number of outstanding stocks. For example if the net profit of X company is Rp 100M, and the outstanding stock is 1 million stocks, then the EPS will be:Earning per share= Net Profit/Outstanding Stocks =Rp 100 / 1 million stocks = Rp 100/stock.
The meaning of EPS is not important if not compared to the price of that company’s share. Meanwhile, Price Earning Ratio is the comparison of share price with earning per share that become important measure that can refer investor to buy stock of one company. If share price of X company in particular period is Rp 500 per share, then the PER calculation is:
PER= Share price/number of share/earning per share = Rp 500 / Rp 100/number of share = 5 fold
Most investors only took PER as the comparison and think that low PER means the company is sold at cheap price. This assumption is not totally right. Because, sometimes low PER compared to the industry indicates a problem in the company. Beside that, PER become not quite relevant to value operating performance of a company due to the distortion in the amount of net profit (loss) due to accounting implementation on the profit (loss) item due to difference in forex. To omit the distortion, don’t use the net profit per share (EPS) but the Operating Profit per Share or OPS.
P/OPS= Price / Operating Profit per Share
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