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: