Many times investors analyze and check the industry PE ratio to decide whether they should invest or not. If you are also one of the investors or willing to be, you must know what Industry PE or Price to Earnings Ratio is. Here in this blog, I will be explaining the same with the detailed approach, so keep scrolling down.
Before knowing the industry Price to Earnings ratio, it is better to know the PE ratio first.
What is PE or Price to Earnings Ratio?
The ratio shows the relationship between one organization’s or company’s stock price and its EPS or earnings per share. This ratio helps understand the actual worth of a company’s stock or share in the financial market. Knowing about futuristic earnings is an essential factor because every investor wants to know how profitable the share or stock is to get maximum return on the investment.
What is Industry PE Ratio?
You have understood the PE ratio; therefore, now you can understand industry PE or Price to Earnings ratio.
The industry PE ratio is the average or means of the PE ratio of the related or particular sector. It is used to analyze the price to earning of the stock to the PE of the entire industry. In simple words, industry PE is the ratio used to compare the PE of the particular industry, whether it is banking, financing, or any other institution.
For example, if we have to know the industry PE ratio of banks, we need to know the PE of banks.
Let’s take it practically if we have HDFC bank, Kotak Mahindra, Axis, Induslnd, Bandhan, and ICICI banks having their PE ratio 22.31, 37.45, 33.54, 12.49, 16.71, and 30.56. Then to calculate industry PE, we need to take the average or mean of the available PE. And as a result, we will get 25.51 as the industry PE ratio. Now you can use it to compare the individual PE for each bank. If we compare, we will find that Kotak offers lower returns than the other banks, and ICICI is offering a bit more expensive than its peer.
So, what you need to focus on here.
- A company with lower PE does not need to be an excellent company to buy those stocks. Because these companies might not work well in the long run, and you will have to compromise.
- The low PE can also reflect that the company or the organization is struggling with common issues like non-performing assets or managerial issues.
- The fast-growing companies have command on higher PE than the industry PE.
Please note: the data I have to take was based on March 13, 2020, and I also selected some banks to keep the example straightforward.
What is a Good PE Ratio?
You have understood PE and industry PE ratio. However, somewhere you may still be thinking about what is the excellent pe ratio. It is a standard question that every investor keeps thinking about it. But to choose the excellent pe ratio depends on various factors, including current market conditions, industry type, and industry PE ratio.
However, while selecting the better PE, you should examine other similar companies that come under the same industry. Although, you can avoid the stocks with higher ratios because this indicates the value trap investment’s risk.
Therefore there is not such a foolproof ratio on which you can entirely rely. However, you can use these in an optimized way to compare with different companies and the same industry to understand trends to make further decisions.
So, I hope you have understood what the industry PE ratio is, and now you can understand it easily before making any investment decision. In the end, you should always use this ratio as a powerful tool to compare a company and its industry.