Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Price-Earnings Relative

What it is:

The price-earnings relative is a comparison of a stock's P/E ratio to the cumulative P/E ratio of a related market index.

How it works (Example):

The price-earnings relative considers the P/E of a given stock relative to the P/E ratio for a comparable market index, such as the Dow Jones or S&P 500. The formula for price-earnings relative is:

Price-Earnings Relative = Stock P/E ratio / Index P/E ratio

As a method of performance measurement, a price-earnings relative of less than 1.0 indicates that the stock had poorer earnings performance than the overall market, while a value of greater than 1.0 means that the stock performed more strongly than the overall market. A stock that tracked exactly the market's earnings performance would have a price-earnings relative equal to 1.0.

For example, if the P/E ratio for a given stock was 0.85 and the P/E for the S&P 500 was 1.1 for the same period, the price-earnings relative would be 0.85 / 1.1 = 0.77, meaning that it did not perform as well as the overall market.

Why it Matters:

The price earnings relative helps to assess whether or not a stock's performance was adequate given overall market performance.