[Stock Investment] Finding Hidden Gem Stocks with PER and PBR

When you first start investing in stocks, two of the most common terms you'll encounter are PER and PBR. These two indicators are the most fundamental metrics for evaluating a company's value. However, it can be dangerous to simply assume that a stock with a low number is 'unconditionally an undervalued, good stock'. In this article, we'll take a closer look at what PER and PBR mean, and how to interpret and utilize these two indicators.

PER and PBR, Just the Essentials | The Two Compasses of Value Investing, How to Use Them Correctly

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1. PER (Price Earning Ratio)

PER is an indicator that shows how many times the current stock price is relative to the company's net profit. It can be understood as the number of years it would take to recover the current market capitalization with the net profit the company earns in one year.

PER = Current Stock Price / Earnings Per Share (EPS)

Generally, a lower PER suggests that a stock is valued at a lower price and is considered undervalued, while a higher PER is interpreted as being overvalued. However, this is not an absolute standard. Companies with high growth potential are sometimes given a high PER by the market in anticipation of high future profits. Therefore, it is important to analyze PER by comparing it with other companies in the same industry or with the company's past PER.

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2. PBR (Price Book-value Ratio)

PBR is an indicator that shows how many times the current stock price is relative to the company's net assets. It compares the value that shareholders would get if the company's assets were all liquidated—the book value—with the current stock price.

PBR = Current Stock Price / Book-value Per Share (BPS)

A PBR of less than 1 means that the stock price is lower than the book value. Theoretically, a company with a PBR of less than 1 could return assets worth more than the stock price to shareholders if the company were liquidated immediately. However, PBR also has limitations as it is difficult to reflect a company's intangible assets (brand value, technology, etc.). It is especially difficult to determine value with PBR for companies where human resources are important, such as in the entertainment or gaming industries.

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3. Why You Should Look at PER and PBR Together

PER and PBR are indicators that evaluate a company's profitability and asset value, respectively. PER shows how well a company makes money, while PBR shows how many assets a company has. By analyzing these two indicators together, you can get a more comprehensive picture of a company's value.

        

Companies with Low PER and Low PBR

These companies have good profitability and a high possibility of being undervalued relative to their asset value. Many value investors prefer these companies, but close scrutiny is needed as there may be pitfalls such as temporary profits or a decline in asset value.

Companies with Low PER and High PBR

This means that a company has good profitability, but the stock price is high compared to its net assets. This phenomenon occurs, for example, in IT companies that have few assets but generate high net profits.

Companies with High PER and Low PBR

This means that a company has low profits but high asset value. It may be undervalued because its assets are not being utilized efficiently, and there is a possibility that its value could increase in the future through asset revaluation or business structure improvements.

In conclusion, while PER and PBR are useful tools for judging a company's value, it is dangerous to make investment decisions based on these indicators alone. It is desirable to compare the two indicators together and further analyze them along with other financial indicators such as ROE (Return on Equity), ROA, and debt ratio. In addition, taking into account the characteristics of each industry, the company's growth stage, and the overall market situation can lead to successful investments.

The content of this blog is for reference in investment decisions only, and investment decisions should be made based on individual judgment and responsibility. Under no circumstances can the information in this blog be used as evidence for legal liability for investment outcomes.