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0-4 4-8 8-12 12-16 16-20 20-25 25-30 30-40 40-50 50-75 75-100 >100

PE Ratio range

Data from Value Line: The number of firms in the United that fall within each PE ratio class for stocks is reported.

Looking at this distribution, you can see that while there are a large number of companies with PE ratios between 8 and 20, there are also a significant number of companies with PE ratios well in excess of 100. Some of these companies are high growth companies that trade at high prices relative to current earnings, because investors expect their earnings to grow substantially in the future. Some of these companies are cyclical companies whose earnings have dropped as a consequence of a recession. Since investors expect their earnings to bounce back as the economy recovers, the price earnings ratio is high. At the other extreme are companies whose PE ratios are 8 or less. In October 2002, these firms would be considered cheap if you looked at just the PE ratio. A final point about these PE ratios relates to companies where the PE ratio could not be computed because earnings per share were negative. In the sample, which included 7102 companies, 3489 companies had negative earnings in the most recent financial year and current PE ratios could not be computed for them. With trailing and forward earnings, you continue to lose about 40% of the overall sample for the same reason.

The fact that PE ratios cannot be less than zero but can take on very high values has consequences when you compute statistics. The average PE ratio, which is computed by averaging across all companies, will be pushed up by the extreme high values. A far more meaningful statistic would be the median PE; half of all companies will have PE ratios less than this value and half of all companies will have PE ratios that are higher than this value. Table 3.1 presents summary statistics on both measures of the price earnings ratio starting with the mean and the standard deviation, and including the median, 10th and 90th percentile values.

Table 3.1: Summary Statistics - PE Ratios for U.S. Stocks
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