The price-to-earnings ratio (P/E) is one of the most common metrics used by investors to analyze whether investment in a company is worthwhile. The P/E ratio formula is:
P/E Ratio=Earnings Per SharePrice Per Share
Investors interpret the price per earnings ratio as the price they are willing to pay for each dollar of a company's earnings. For example, if a company's stock was trading at $50 per share and had earnings of $5 per share, its P/E ratio would be 10.
Average P/E Ratio for the Financial Services Industry
The financial services industry makes up a sizable portion of the U.S. gross domestic product (GDP). For this reason, it has been heavily watched by investors for years as an indicator of the overall health of the economy.
Companies that operate within the industry include those focused on brokerage operations, conventional banking, asset management, as well as debt and credit services. Since the financial services industry plays an important role in the overall performance of the markets, investors should be concerned with the average P/E ratio of this sector.
As of August 2018, the average P/E ratio of the financial services industry is 14.26. This metric includes the sector averages of specific financial service categories, including banks with a P/E ratio of 13.51, capital markets with a P/E ratio of 18.83, and insurance with a P/E ratio of 14.64. A smaller sector in the broader financial services category, thrifts and mortgage finance has the highest P/E at 32.17, while the lowest at this time is the mortgage REITs sector at 7.11.