Daily Economics, Business and Finance Study

September 21, 2026 (KST) · Day 2
Today's topic: Why PER Alone Can Mislead — Comparing PER, PBR, EV/EBITDA and FCF Yield

1. Review of the previous lesson

On Day 1, we learned that a stock's price is the present value of the cash flows the company will generate in the future. That was the basic principle. Today, we compare four common measures of whether the current price is expensive relative to earnings, assets, operating performance and cash flow.

2. Today's core concepts

PER, PBR, EV/EBITDA and FCF yield all assess company valuation, but they compare different things and reflect different financial factors.

• PER: Share price relative to net income attributable to shareholders
• PBR: Share price relative to book equity
• EV/EBITDA: The value of the whole business, including debt, relative to operating performance
• FCF Yield: Actual free cash generation relative to current market capitalization

A conclusion such as “a low PER means it is cheap” is therefore insufficient. A low PER may reflect temporary profits, excessive debt or the peak of an industry cycle.

3. Concepts explained

3-1. PER: Price relative to earnings

\[PER=\frac{\text{Share price}}{\text{Earnings per share (EPS)}}=\frac{\text{Market capitalization}}{\text{Net income attributable to common shareholders}}\]

A PER of 10 means investors pay 10 times annual net income, under the simplifying assumption that current net income continues unchanged.

Advantages

• It is widely used and easy to understand.
• It is convenient for comparing companies in the same industry with similar profitability.
• It compares share price with earnings attributable to shareholders, aligning the numerator and denominator.

Limitations

• A meaningful PER cannot be calculated for a loss-making company.
• It is affected by one-off items such as asset-sale gains, impairment losses and foreign-exchange gains or losses.
• It does not adequately capture differences in financial risk between companies with very different debt levels.
• Cyclical companies can appear to have their lowest PER when earnings surge at the peak of a boom.

In other words, a low PER can indicate undervaluation, but it can also warn that earnings are about to decline.

3-2. PBR: Price relative to net assets

\[PBR=\frac{\text{Share price}}{\text{Book value per share (BPS)}}=\frac{\text{Market capitalization}}{\text{Common shareholders' equity}}\]

A PBR of 1 means the market value of shareholders' interests equals accounting book equity.

Advantages

• It is useful in banking, insurance and securities businesses, where assets and equity are central to generating returns.
• It reflects accumulated profits and losses and the capital position.
• It can be calculated for a loss-making company if equity remains positive.

Limitations

• The book value of tangible assets such as factories and land can differ from current market value.
• Internally generated intangible assets such as brands, technology, data and human capital are not fully reflected.
• Share repurchases or major impairment losses can shrink equity and raise PBR.
• A low PBR may reflect low ROE, impaired assets or structurally low profitability.

Rather than viewing PBR alone, it is important to interpret it through this relationship.

\[ROE=\frac{\text{Net income}}{\text{Shareholders' equity}}\]

Generally, a higher sustainable ROE is more likely to justify a higher PBR. Even a low PBR does not necessarily imply undervaluation if ROE remains persistently below the cost of capital.

3-3. EV/EBITDA: Price relative to the whole business's operating performance

EV is enterprise value, considering capital provided by both shareholders and creditors.

\[EV\approx\text{Market capitalization}+\text{Total debt}-\text{Cash and cash equivalents}\]

More precise calculations may add adjustments for preferred shares, non-controlling interests, pension liabilities and other items.

\[EV/EBITDA=\frac{\text{Enterprise value (EV)}}{\text{EBITDA}}\]

EBITDA is earnings before interest, taxes, depreciation and amortization.

\[EBITDA\approx\text{Operating income}+\text{Depreciation and amortization}\]

Advantages

• Because it accounts for debt and cash, it helps compare companies with different capital structures.
• By removing the effects of interest expense and income taxes, it is useful for comparing core operating performance.
• It is often used for telecom, semiconductor, infrastructure and manufacturing companies with large depreciation charges.

Limitations

• EBITDA is not actual cash flow.
• It does not reflect capital expenditure, increases in working capital, interest payments or tax payments.
• It can overstate cash generation in capital-intensive businesses that must continually replace equipment.
• The treatment of lease liabilities and EBITDA can differ by company or data provider.

Consequently, even a low EV/EBITDA may leave little cash for shareholders if capital expenditure or debt repayment burdens are excessive.

3-4. FCF yield: Price relative to actual free cash flow

The simplest free cash flow calculation is:

\[FCF=\text{Operating cash flow (OCF)}-\text{Capital expenditure (CapEx)}\]

\[FCF\ Yield=\frac{\text{FCF}}{\text{Market capitalization}}\times100\]

An FCF yield of 8% means the company generated free cash equal to 8% of its current market capitalization over 1 year. All else equal, a higher FCF yield suggests a greater possibility of undervaluation.

This is similar to earnings yield, the inverse of PER, but uses actual cash flow in place of accounting net income.

Advantages

• It shows whether earnings actually convert into cash.
• It helps assess the funds available for dividends, share repurchases, debt repayment and acquisitions.
• It helps screen out companies with high accounting profits but weak cash flow.

Limitations

• Working-capital changes or one-off investments can cause a particular year's FCF to fluctuate sharply.
• Major capacity expansion by a growth company can reduce current FCF while increasing future growth.
• The definition of CapEx can differ across companies.
• Some analyses use EV rather than market capitalization as the denominator, so check definitions before comparing.

In this lesson, we use the common shareholder-oriented definition: FCF ÷ Market capitalization as our measure.

Key differences between the four measures

4. A simple numerical example

The following figures for companies A and B in the same industry are hypothetical educational examples. All monetary amounts are in units of KRW 100 million, and we assume the figures cover the latest 12 months.

① PER

\[\text{Company A}\ PER=1,000\div100=10\text{x}\]

\[\text{Company B}\ PER=1,000\div100=10\text{x}\]

Based on PER alone, the two companies are identical.

② PBR

\[\text{Company A}\ PBR=1,000\div500=2.0\text{x}\]

\[\text{Company B}\ PBR=1,000\div800=1.25\text{x}\]

B trades at a lower price relative to book equity. However, you must also examine both companies' ROE and asset quality.

③ EV/EBITDA

\[\text{Company A}\ EV=1,000+400-100=1,300\]

\[\text{Company A}\ EV/EBITDA=1,300\div200=6.5\text{x}\]

\[\text{Company B}\ EV=1,000+100-300=800\]

\[\text{Company B}\ EV/EBITDA=800\div200=4.0\text{x}\]

Both companies have the same market capitalization and EBITDA, but A has more net debt, making A more expensive from the perspective of acquiring the whole business.

④ FCF Yield

\[\text{Company A}\ FCF=160-80=80\]

\[\text{Company A}\ FCF\ Yield=80\div1,000=8\%\]

\[\text{Company B}\ FCF=210-60=150\]

\[\text{Company B}\ FCF\ Yield=150\div1,000=15\%\]

Both have a PER of 10, but B has net cash and higher FCF. If other business conditions are equal, the four measures together suggest that B may be relatively undervalued. That is what the comparison indicates.

This alone does not justify buying B. Check whether its high FCF comes from one-off factors such as working-capital release or reduced investment, and whether it can be sustained.

5. Practical use in stock and company analysis

In practice, the following sequence is useful.

① Compare on a consistent basis

• Compare companies in the same industry.
• Use share prices from the valuation date.
• Use the latest 12 months (LTM) or the same fiscal year for net income, EBITDA and FCF.
• Do not mix consolidated and separate financial statements.
• Use consistent currencies and units.

② Start with PER

If PER is below that of peers, ask:

• Are future earnings expected to decline?
• Do current earnings include one-off disposal gains?
• Is debt excessive?
• Is the industry at a cyclical peak?
• Does corporate governance or business risk warrant a discount?

③ Connect PBR with profitability

Always examine PBR alongside ROE.

• Low PBR + Improving ROE: Potential for revaluation
• Low PBR + Persistently low ROE: Potentially a consequence of low profitability rather than structural undervaluation
• High PBR + High sustainable ROE: May be partly justified
• High PBR + Declining ROE: Potential valuation pressure

④ Use EV/EBITDA to assess debt differences

Even with similar PERs, a company with more net debt may have a higher EV/EBITDA. This is particularly useful in acquisitions or in comparing telecom, infrastructure and manufacturing companies with different capital structures.

Do not stop at EBITDA. Always continue through the next steps.

\[ EBITDA \rightarrow OCF \rightarrow FCF \]

Even if EBITDA rises, FCF can decline if inventories and receivables increase or CapEx surges.

⑤ Check ultimate cash generation using FCF yield

Examine the following three together.

• FCF over the latest 1 year
• Average or cumulative FCF over 3–5 years
• The outlook for normalized future FCF

A high FCF yield in just one year may reflect temporary working-capital release or reduced investment. Conversely, low current FCF caused by new factories or data centers may lead to future revenue and FCF, changing a simple undervaluation assessment.

Today's practical conclusion

PER is a starting point, not a conclusion.

When comparing companies, ask at least these four questions.

1. Is the share price low relative to net income? → PER
2. Is the share price low relative to net assets? → PBR
3. Is it still cheap if you assume the debt too? → EV/EBITDA
4. Is the share price low relative to actual cash remaining? → FCF Yield

6. What to look for in disclosures

Korean companies: Annual and quarterly reports on DART

Financial Supervisory Service DART Open the company's annual or quarterly report there and check the following items.

Market capitalization and the current share price are not accounting figures in the financial statements. Therefore, separately verify the share price and outstanding or issued share count for the same valuation date. This is necessary.

US companies: SEC 10-K and 10-Q

SEC EDGAR search Search by company name or ticker and select a 10-K or 10-Q. Under the SEC form structure, the 10-K is the annual report, with financial statements and supplementary information mainly in Item 8. The 10-Q is the quarterly report, with financial statements mainly in Part I, Item 1. SEC Form 10-K, SEC Form 10-Q

• Consolidated Statements of Operations: Net income, operating income, EPS
• Consolidated Balance Sheets: Cash, debt, stockholders’ equity
• Consolidated Statements of Cash Flows: Operating cash flow, purchases of property and equipment
• Debt note: Maturities, interest rates, and short- and long-term borrowings
• EPS and Stockholders' Equity notes: Diluted share count, treasury shares and stock-based compensation
• MD&A: Management's explanation of changes in earnings and cash flow

In US cash flow statements, CapEx is commonly labeled Purchases of property and equipment or similarly, but terminology and scope vary by company. FCF is not an official GAAP line item, so analysts must calculate it using consistent definitions of OCF and CapEx. This is necessary.

7. Key takeaways

• PER is based on net income; PBR on equity; EV/EBITDA on enterprise value including debt and operating performance; and FCF yield on actual free cash flow.
• A low PER may indicate undervaluation, but also declining earnings, excessive debt or a cyclical peak.
• Examine PBR alongside ROE, and EV/EBITDA alongside net debt and CapEx.
• FCF yield shows cash generation, but adjustments are needed for single-year working-capital movements and major investments.
• In practice, PER → PBR·ROE → EV/EBITDA → FCF Yield cross-checking in this sequence reduces errors from relying on a single measure.

8. Three review questions

Question 1

What is the PER of a company with market capitalization of 2,000 and net income of 200 (units: KRW 100 million)?

Question 2

Calculate EV and EV/EBITDA for a company with market capitalization of 2,000, total debt of 800, cash of 300 and EBITDA of 500 (units: KRW 100 million).

Question 3

Both companies have a PER of 8. Company C has net cash and an FCF yield of 12%, while company D has substantial net debt and an FCF yield of 3%. All else equal, which looks relatively stronger, and what else should you check?

Answers and explanations

Answer 1:

\[PER=2,000\div200=10\text{x}\]

Answer 2:

\[EV=2,000+800-300=2,500\text{ (KRW 100m)}\]

\[EV/EBITDA=2,500\div500=5\text{x}\]

Answer 3:
At first glance, Company C looks relatively stronger. Its PER is the same, but it has a sounder financial structure and generates more free cash relative to market capitalization. However, check whether C's high FCF reflects one-off working-capital release or lower investment, and whether D's low FCF reflects temporary investment for future growth.

Next lesson — Day 3:
“Revenue, Operating Income and Net Income: Reading the Income Statement from Top to Bottom”