V.9:10 (426-429): SIDEBAR: CALCULATING PERR

V.9:10 (426-429): SIDEBAR: CALCULATING PERR
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CALCULATING PERR

Price/earnings ratio reliability (PERR) is simply 100 the R-square that measures the correlation between the logarithms of price and earnings. PERR is most easily visualized through scatter charts: Article Figure 2 shows Merck's high PERR of 85.5, with scatter points keeping close to the 45-degree line that bisects the price and earnings axes, while Article Figure 4 shows uncorrelated scatter with Alcoa's low PERR of 15.9.

Normally, R-square is encountered as a byproduct of a regression analysis, which often reports R-bar-square, adjusted for degrees of freedom. PERR uses the simpler R-square calculation (see below) in a form within the capabilities of many hand calculators.

For n years (from annual reports or stock services), obtain annual earnings per share and the mid-range between the high and low stock prices for the year. Calculate E as the natural log of earnings and P as the natural log of price. For example:




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