When valuing stocks, analysts and investors often look at a metric called the price-to-earnings (P/E) ratio, which compares a company’s stock price to company earnings. P/E ratios exist for individual stocks, of course, but they can also be calculated for an overall industry or sector. The average of the P/E ratios of companies in that sector, this metric can help put an individual stock’s performance in perspective against its peers. It is also useful in asset allocation and portfolio diversification.
Let’s look at the P/E ratio for the retail sector, which is the retail stocks of companies that distribute or sell goods and services to consumers.
Key points to remember
- The price/earnings ratio (P/E) is a valuation metric that measures a company’s stock price relative to its earnings.
- Investors look at the P/E ratio to determine if a company’s stock price is undervalued or overvalued.
- The retail industry is divided into seven categories: automotive, building materials, distributors, general, grocery and food, online, and specialty retail businesses.
- The current P/E ratio for the retail sector, an average of the sub-sector ratios, is 64.65 (current as of January 2021).
- The average P/E ratio for the retail sector in January 2021 was 22.70.
What is the price/earnings ratio?
But first, a little background. The price-to-earnings (P/E) ratio, sometimes referred to as a “multiple”, measures a company’s stock price relative to its earnings per share (EPS). P/E is commonly used in fundamental analysis as a valuation measure. Analysts and fundamental investors use it to determine whether a company’s stock price is appropriate in relation to the earnings per share (EPS) generated by the company.
If a company has a high P/E ratio, investors are willing to pay a higher price for its stock relative to its earnings. For example, Company ABC has a P/E ratio of 12. Therefore, an investor is willing to pay $12 for every dollar of profit. A ratio of 2 means an investor is willing to pay $2 for every dollar of business profit.
Generally, high P/E ratios indicate a company’s stock is overvalued, while low P/E ratios indicate a company’s stock is undervalued. The P/E ratio alone does not provide a holistic view of a company’s stock value. This ratio, along with other metrics and research, can help investors make well-informed and well-informed decisions about a company’s stock value.
Different industries may calculate their earnings differently and at different times, and comparing P/E ratios for companies in different industries may not be appropriate.
Understanding the Average P/E Ratio of the Retail Industry
New York University’s Stern School of Business publishes P/E data for different industries, including the retail sector. The retail industry is divided into seven categories: automotive, building materials, distributors, general, grocery and food, online, and specialty retail businesses.
The categories and the companies that make them up are very varied. The list of companies includes large-cap stocks, such as Walmart (WMT), Costco Wholesale (COST), Dollar Tree (DLTR) and The Home Depot (HD), which trade on major exchanges. But it also includes smaller stocks that trade over-the-counter, like Dougherty’s Pharmacy, Inc. (MYDP), California Grapes International (CAGR), The Bon-Ton Stores, Inc. (BONT.Q), and Meso Numismatics ( MSVS).
According to the NYU Stern School, in January 2021 and using 12-month data, the average P/E ratio for the retail sector is 22.70. This value ranges from a low of 14.41, which is the average for grocery and food retailers, to a high of 140.11, which is the average for building materials retailers.
Additionally, in January 2021, online retail companies have an average P/E ratio of 131.27, automotive retailers have an average of 17.52, general retail companies have an average of 22.70, grocery and food retail businesses have an average of 14.41, retail distributors have an average of 138.44, and specialty line retail businesses have a P/ Average E of 55.99.
Calculation of the P/E ratio of the retail sector
The average P/E ratio for the retail sector is calculated using the arithmetic mean. You add up all the P/E ratios for each individual sub-sector, then divide by seven (the number of categories), to calculate it.
Take, for example, the current P/E ratio of the retail sector (as of January 2021). First, total the individual P/E ratio of each sub-sector:
|Retail Category||Current P/E ratio|
|Grocery and food||40.60|
The total is 452.55. Divide that number by seven and you get 64.65, the current average P/E ratio for the entire retail industry.