The price/earnings ratio
The PER is probably the most important indicator when assessing shares. It’s a simple calculation: “a share’s price” divided by “a share’s earnings”. An example calculation: the current price of a share is CHF 100. Earnings of CHF 5 per share were achieved in the previous financial year. The analysts’ forecast for the current financial year is usually used for the earnings. The PER in our example is 100 divided by 5 = 20. In other words, the PER indicates how often the earnings are contained in the current share price or after how many years the earnings have “paid for” the share.
The lower the PER, the better a share’s valuation and the greater the chance of high anticipated company earnings in future. The PER can only be used to compare similar business models, such as companies in the same sector. Exactly why a PER is high or low must always be examined in depth. As a yardstick, it is interesting to note that the PER of all securities listed on the SMI in 2017 stood at 24.6 on average.