Absolute P/E Ra꧅tio vs. Relative P/E Ratio: An Overview

The absolute and relative P/E ratios are metrics to determine if a company is over or undervalued. The simple answer to this question is that absolute P/E is the price of a stock divided by the company's 澳洲幸运5开奖号码历史查询:earnings per share (EPS). This is the more common m🦋easure, and it indicates how m♓uch investors are willing to pay per dollar of earnings.

The 澳洲幸运5开奖号码历史查询:relative P/E ratio, on the other hand, is a measure that compares the current P/E ratio to the past P/E rati꧅os o♐f the company or to the current P/E ratio of a benchmark. Let's look at both absolute and relative P/E in more detail.

Absolute P/E Ratio

The numerator of this ratio is usually the current stock price, and the denominator may be the 澳洲幸运5开奖号码历史查询:trailing EPS (from the 澳洲幸运5开奖号码历史查询:trailing 12 months [TTM]), the estimated EPS for the next 12 months (澳洲幸运5开奖号码历史查询:forward P/E) or a mix of the trailing EPS of the last💦 two quarters and the forward P/E for the next two quarters♈.

When distinguishing absolute P/E from relative P/E, it is important to remember that absolute P/E represents the P/E of the current time period. For example,🌞 if the price of the stock today is $100, and the TTM earnings are $2 per share, the P/E is 50 ($100/$2).

Relative P/E Ratio

Relative P/E compares the current absolute P/E to a benchmark or a 澳洲幸运5开奖号码历史查询:range of past P/Es over a relevant time period, such as the last 10 years. Relative P/E shows what portion or perc🌠entage of the past P/Es the current P/E has reached. Relative P/E usually compares the current P/E value to the highest value of the range, but investors might also compare the current P/E to the bottom side of the range, measuring how close t♊he current P/E is to the historic low.

The relative P/E will have a value below 100% if 澳洲幸运5开奖号码历史查询:the current P/E is lower than the past value (whether the past is high or low). If the relative P/E m🔯easure is 100% or more, this tells investors that the current P/E has reached or surpassed the p💦ast value.

Example of Absolute vs. Relative P/E Ratio

Suppose that a company's shares are currently trading for $100, and the company reports $4 of earnings per share. The company's absolute P/E ratio is 25, meaning that shareholders pay $25 for every $1 of earnings. This is the P/E ratio that is usually reported on stock screeners or company summaries.

But stock analysts may wish to examine how the company's absolute P/E ratio has changed over time, or how it compares with the industry at large. Suppose that the company's P/E ratio has ranged from 15 to 40 over the past ten years. If the current (absolute) P/E ratio is 25, the relative P/E comparing the current P/E to the highest value of this past range is 0.625 (25/40), and the current P/E relative to the low end of the range is 1.67 (25/15).

These values tell investors that the company's current P/E is 62.5% of the 10-year high, and 67% higher than the 10-year low.

Special Considerations

If all is equal over a given time period, a P/E ratio that is close to its historical high could be a sign that the stock is overvalued. However, there is a lot of discretion that goes into interpreting relative Pꩵ/E. Fundamental shifts in the company, such as a major acquisition, can justifiabಞly raise the P/E above the historic high.

Relative P/E may also compare the current P/E to the average P/E of a benchmark such as the 澳洲幸运5开奖号码历史查询:S&P 500. Continuing with the example above, sꦡuppose the average P/E ratio in the S&P 500 is 20. The relative P/E of 💧the company to the index is therefore 1.25 (25/20).

This shows investors that the company has a higher P/E relative to the benchmmark, indicating that 澳洲幸运5开奖号码历史查询:the company's earnings 🎶are more expensive than those of other companies in the index.

A higher P/E, however, does not necessarily mean it is a bad investment. On the contrary, it may mean the company's earnings are growing faster than those of other companies in the index. If there is a large discrepancy between the company's P/E ratio and the P/E of the index, investors may want to do additional research into the discrepancy.

The Bottom Line

Absolute P/E, compared to 澳洲幸运5开奖号码历史查询:relative P/E, 🍨is the most often used measure and is useful in investment decision-making. Howe🐟ver, it is often wise to expand the application of that measure with the relative P/E measure to gain further information.