As of January 2015, the current price-to-earnings, or P/E, ratio was 15 for auto manufacturers and 20 for auto parts manufacturers. The forward P/E ratios, which are based on projected earnings, are 29 and 17, respectively.
The automotive sector is composed of companies that manufacture original equipment and automobiles; provide maintenance for automobiles; sell automobiles; or produce, manufacture and sell spare parts and other vehicle components. The automotive sector is not restricted to manufacturing and producing commercial vehicles and cars. Specialized industrial vehicles; automobile research and development, or R&D; design; and auto finance are all included in this industry. The three largest companies that affect the sector’s performance in the United States are Ford, General Motors and Chrysler.
The P/E ratio is one of the most frequently used of all equity evaluation metrics. This ratio is calculated by dividing a company’s current stock price by the stock’s earnings per share, or EPS.
There are two basic variations of the P/E ratio, and both are affected by how EPS is determined. The first, and most basic, is based on the reported quarterly net income from a company’s most recent 12 months. Using these figures generates a current or trailing P/E ratio. The other most common variation on the P/E ratio is the use of estimated, or projected, future EPS for the next 12 months. The ratio value is generated using EPS values determined by investment research analysis. This is known as the forward P/E ratio.
High P/E ratios indicate positive expectations for company growth and increased earnings. A company's P/E ratio is best considered in comparison to that of similar companies, and viewed over an extended time period, to see a clear picture of a company's long-term trend in P/E values and performance. Looking at historical performance enables investors to determine, for example, whether current or forward P/E values more accurately predict stock price performance.