The average price to earnings ratio (P/E) for banking firms, as of January 2015, is approximately 17.8. This compares with an overall market average P/E ratio of 35.25 – but this is a simple arithmetic average, skewed by the figures for a very small number of firms with P/E ratios over 100 or 200. A mean or median average would show the banking industry's average P/E ratio much closer to typical market performance. The best-performing regional banks, because of the larger potential for rapid growth, tend to have P/E ratios noticeably higher than those for the large, major banks.

The P/E ratio is one of the most widely used equity evaluation metrics by investors and analysts. It is simple to calculate. It results from dividing the current stock price by earnings per share (EPS), and it provides investors an assessment of a company in relation to the price that investors have to pay for the company's stock. It is thus not merely an evaluation of the company, but an evaluation of the company's stock at current price levels as well.

As with all equity valuation metrics, the P/E ratio as a standalone number is of limited usefulness for analysis. A company's P/E ratio is most important in terms of how it compares with similar firms in the same industry. For example, as of January 2015, Wells Fargo, perhaps the leading major bank in the United States, is trading with a P/E ratio of 13, while its competitor, Bank of America, currently has a P/E ratio of 10.

Higher P/E ratios are typically considered to indicate higher growth and increased revenue potential, or at least that investors are anticipating higher growth, since they are willing to pay a greater multiple of current earnings per share to obtain the company's stock. Analysts commonly interpret relatively lower P/E ratios as indicative of higher risk. Firms with lower reinvestment needs generally have higher P/E ratios.

  1. What does the forward p/e indicate about a company?

    Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >>
  2. How do I calculate the P/E ratio of a company?

    The P/E ratio is a valuation measure that compares the level of stock prices to the level of corporate profits, providing ... Read Answer >>
  3. How can the price-to-earnings (P/E) ratio mislead investors?

    A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >>
  4. What does it mean if a bond has a zero coupon rate?

    Learn what the average range for the price to earnings (P/E) ratio in the electronics sector is and which factors influence ... Read Answer >>
  5. How can I find the P/E ratio on an ETF's underlying index?

    Learn how analysts and investors can determine the price-to-earnings ratio for the underlying index of an exchange-traded ... Read Answer >>
  6. Absolute P/E Ratio Vs. Relative P/E Ratio

    The difference between absolute P/E and relative P/E is easier when you know why each term is used. Read Answer >>
Related Articles
  1. Investing

    Can Investors Trust The P/E Ratio?

    The P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
  2. Investing

    Beware False Signals From the P/E Ratio

    The P/E ratio is a simple tool for evaluating a company, but it can also send false signals.
  3. Investing

    Is Stock With a Lower P/E Always A Better Choice?

    Is a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things.
  4. Investing

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
  5. Investing

    Differences Between Forward P/E And Trailing P/E

    The most common types of price to earnings ratios are forward P/E and trailing P/E. Find out how they differ and the advantages and drawbacks of each.
  6. Investing

    The 4 Basic Elements of Stock Value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
  7. Investing

    5 Must-Have Metrics for Value Investors

    These quick-and-dirty ratios will help you find the most undervalued stocks on the market.
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. P/E 30 Ratio

    P/E 30 ratio means that a company's stock price is trading at ...
  3. Forward Price To Earnings - Forward P/E

    A measure of the price-to-earnings ratio (P/E) using forecasted ...
  4. P/E 10 Ratio

    The P/E 10 ratio is a valuation measure, generally applied to ...
  5. Trailing Price-To-Earnings - Trailing P/E

    The sum of a company's price-to-earnings, calculated by taking ...
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center