When it comes to analyzing and evaluating stocks, one of the most commonly used metrics is the price-to-earnings (P/E) ratio. The PE ratio helps investors assess a stock's value relative to its earnings. However, the average PE ratio can vary significantly between different industry sectors.
First, let's define the P/E ratio. The P/E ratio is calculated by dividing a company's stock price by its earnings per share (EPS).
Price to Earnings Ratio = Stock Price / TTM Earnings Per Share (EPS)
This ratio shows how much investors are willing to pay for each dollar of earnings the company generates. A high P/E ratio indicates that investors expect strong future growth, while a low P/E ratio suggests investors are less optimistic about the company's future prospects.
The average P/E ratio varies significantly by industry. Here is a table showing average PE ratios by industries in the US as of Jun 2023:
| Industry | Average P/E ratio | Number of companies |
|---|---|---|
| Advertising Agencies | 23.35 | 23 |
| Aerospace & Defense | 22.51 | 47 |
| Agricultural Inputs | 13.73 | 10 |
| Airlines | 22.7 | 13 |
| Apparel Manufacturing | 15.2 | 17 |
| Apparel Retail | 11.2 | 30 |
| Asset Management | 14.65 | 73 |
| Auto Parts | 19.64 | 41 |
| Auto & Truck Dealerships | 10.98 | 14 |
| Banks - Diversified | 8.61 | 5 |
| Banks - Regional | 8.63 | 282 |
| Beverages - Non-Alcoholic | 32.39 | 9 |
| Biotechnology | 15.31 | 553 |
| Broadcasting | 12.48 | 18 |
| Building Materials | 17.1 | 6 |
| Building Products & Equipment | 14.65 | 30 |
| Business Equipment & Supplies | 14.03 | 8 |
| Capital Markets | 19.23 | 29 |
| Chemicals | 12.16 | 17 |
| Communication Equipment | 26.52 | 52 |
| Computer Hardware | 24.87 | 25 |
| Conglomerates | 17.84 | 10 |
| Consulting Services | 34.63 | 16 |
| Credit Services | 14.2 | 46 |
| Department Stores | 8.98 | 5 |
| Diagnostics & Research | 29.25 | 68 |
| Discount Stores | 25.55 | 9 |
| Drug Manufacturers - General | 27.01 | 11 |
| Drug Manufacturers - Specialty & Generic | 17.48 | 52 |
| Education & Training Services | 20.39 | 14 |
| Electrical Equipment & Parts | 17.01 | 39 |
| Electronic Components | 25.46 | 28 |
| Electronic Gaming & Multimedia | 27.98 | 9 |
| Electronics & Computer Distribution | 10.08 | 6 |
| Engineering & Construction | 22.16 | 34 |
| Entertainment | 29.63 | 37 |
| Farm & Heavy Construction Machinery | 15.44 | 21 |
| Farm Products | 15.33 | 15 |
| Financial Data & Stock Exchanges | 36.52 | 10 |
| Food Distribution | 21.76 | 10 |
| Footwear & Accessories | 14.4 | 11 |
| Furnishings, Fixtures & Appliances | 11.23 | 20 |
| Gambling | 10.07 | 11 |
| Grocery Stores | 15.82 | 10 |
| Healthcare Plans | 20.01 | 12 |
| Health Information Services | 54.16 | 33 |
| Home Improvement Retail | 18.91 | 7 |
| Household & Personal Products | 35.76 | 24 |
| Industrial Distribution | 19.56 | 16 |
| Information Technology Services | 25.53 | 49 |
| Insurance Brokers | 28.46 | 12 |
| Insurance - Diversified | 9.38 | 10 |
| Insurance - Life | 12.31 | 17 |
| Insurance - Property & Casualty | 18.28 | 38 |
| Insurance - Reinsurance | 11.06 | 6 |
| Insurance - Specialty | 17.27 | 15 |
| Integrated Freight & Logistics | 14.11 | 14 |
| Internet Content & Information | 29.21 | 32 |
| Leisure | 15.87 | 28 |
| Lodging | 20.33 | 9 |
| Marine Shipping | 8.26 | 7 |
| Medical Care Facilities | 29.3 | 39 |
| Medical Devices | 37.08 | 105 |
| Medical Distribution | 24.17 | 7 |
| Medical Instruments & Supplies | 44.79 | 44 |
| Metal Fabrication | 13.93 | 12 |
| Mortgage Finance | 11.42 | 18 |
| Oil & Gas E&P | 4.97 | 67 |
| Oil & Gas Equipment & Services | 12.93 | 43 |
| Oil & Gas Midstream | 10.98 | 33 |
| Oil & Gas Refining & Marketing | 7.07 | 18 |
| Packaged Foods | 23.08 | 44 |
| Packaging & Containers | 15.02 | 22 |
| Personal Services | 17.19 | 13 |
| Railroads | 21.69 | 9 |
| Real Estate - Diversified | 17.6 | 4 |
| Real Estate Services | 12.68 | 21 |
| Recreational Vehicles | 9.8 | 16 |
| REIT - Diversified | 22.24 | 20 |
| REIT - Healthcare Facilities | 26 | 16 |
| REIT - Hotel & Motel | 25.14 | 16 |
| REIT - Industrial | 29.31 | 17 |
| REIT - Mortgage | 16.52 | 38 |
| REIT - Office | 23.48 | 24 |
| REIT - Residential | 34.92 | 18 |
| REIT - Retail | 27.94 | 23 |
| REIT - Specialty | 35.68 | 15 |
| Rental & Leasing Services | 15.8 | 20 |
| Residential Construction | 6.25 | 21 |
| Resorts & Casinos | 16.79 | 17 |
| Restaurants | 21.1 | 42 |
| Scientific & Technical Instruments | 33.2 | 23 |
| Security & Protection Services | 24.62 | 15 |
| Semiconductor Equipment & Materials | 22.84 | 24 |
| Semiconductors | 28.95 | 55 |
| Software - Application | 43.3 | 182 |
| Software - Infrastructure | 38.8 | 76 |
| Solar | 52.5 | 11 |
| Specialty Business Services | 23.18 | 28 |
| Specialty Chemicals | 19.74 | 48 |
| Specialty Industrial Machinery | 22.67 | 74 |
| Specialty Retail | 14.46 | 43 |
| Staffing & Employment Services | 16.51 | 23 |
| Steel | 10.2 | 15 |
| Telecom Services | 20.37 | 33 |
| Thermal Coal | 2.78 | 9 |
| Tobacco | 19.96 | 6 |
| Tools & Accessories | 21.33 | 11 |
| Trucking | 12.67 | 14 |
| Utilities - Diversified | 20.38 | 16 |
| Utilities - Regulated Electric | 19.78 | 25 |
| Utilities - Regulated Gas | 17.86 | 13 |
| Utilities - Regulated Water | 34.22 | 12 |
| Waste Management | 27.49 | 11 |
As shown in the table, the Health Information Services industry has the highest average P/E ratio of 54.16, followed by Solar at 52.5. In contrast, the Thermal Coal industry has the lowest average P/E ratio of 2.78, followed by the Oil & Gas E&P industry at 4.97. This variation is due to several factors, including industry-specific risks, growth potential, and investor sentiment.
| Industry | Average P/E ratio | Number of companies |
|---|---|---|
| Health Information Services | 54.16 | 33 |
| Solar | 52.5 | 11 |
| Medical Instruments & Supplies | 44.79 | 44 |
| Software - Application | 43.3 | 182 |
| Software - Infrastructure | 38.8 | 76 |
| Medical Devices | 37.08 | 105 |
| Financial Data & Stock Exchanges | 36.52 | 10 |
| Household & Personal Products | 35.76 | 24 |
| REIT - Specialty | 35.68 | 15 |
| REIT - Residential | 34.92 | 18 |
| Industry | Average P/E ratio | Number of companies |
|---|---|---|
| Thermal Coal | 2.78 | 9 |
| Oil & Gas E&P | 4.97 | 67 |
| Residential Construction | 6.25 | 21 |
| Oil & Gas Refining & Marketing | 7.07 | 18 |
| Marine Shipping | 8.26 | 7 |
| Banks - Diversified | 8.61 | 5 |
| Banks - Regional | 8.63 | 282 |
| Department Stores | 8.98 | 5 |
| Insurance - Diversified | 9.38 | 10 |
| Recreational Vehicles | 9.8 | 16 |
It's important to compare the P/E ratio of a company to the average P/E ratio for its industry. If a company's P/E ratio is higher than the industry average, it may indicate that investors have high expectations for the company's growth potential. Conversely, if a company's P/E ratio is lower than the industry average, it may suggest that investors are less optimistic about the company's future prospects and therefore are willing to pay lower multiple for it.
Some industries tend to have higher P/E ratios than others because they are expected to have higher growth potential and future earnings. On the other hand, industries with lower growth potential or with more mature companies tend to have lower P/E ratios.
There are several industry sectors, each with unique characteristics that impact the P/E ratio. For example:
Other factors that can impact P/E ratios include interest rates, inflation, and macroeconomic trends. High interest rates or inflation can reduce the value of future earnings, causing P/E ratios to decline. Economic recessions or other negative macroeconomic events can also impact P/E ratios across industries.
The P/E ratio is a relative comparison between a company's current stock price and its earnings per share (EPS). There are different types of P/E ratios that can be used depending on the timeline of stock price consideration. The first type is the forward P/E ratio, which compares current earnings to future earnings by estimating what the future earnings might look like.
The second type is the trailing twelve months P/E ratio, which uses EPS data from the past 12 months to judge a company's current performance.
The third type is the absolute P/E ratio, which uses current stock price and data from both the past 12 months and future projections.
Lastly, the relative P/E ratio compares the absolute P/E ratio to P/E values of the past, using a time frame set by investors.
It's important to note that while each type of P/E ratio has its own strengths and weaknesses, investors should consider multiple factors beyond P/E ratios when making investment decisions.
While the P/E ratio is a useful metric, it has some limitations. It's important to note that P/E ratios should not be used as the sole factor when making investment decisions. Investors should consider a range of factors, such as a company's financial health, management team, growth potential, and industry trends, when assessing the value of a company and make more informed investment decisions.