Relative PE

PE comparisons are more meaningful if they are made between similar companies. They are very often used to compare companies in the same sector, which are presumed to have similar long term growth prospects.

Taking this further, the PE can be divided by the average PE for the companies the comparison is being made with. A company PE is often divided by the sector PE of its sector, or the market PE of its market. This gives a sector or market relative PE.

This gives a measure of how expensive a share is against peers. If it is less than one it is cheaper, if it is more than one it is more expensive. A share with a relative PE, against the sector, or 1.2 would be described as trading at a 20% premium to the sector.

This measure is not useful unless one considers why it is cheaper or more expensive, and how much of a premium or discount is actually deserved.

Copyright © 2005-2016