In evaluating equities, analysts and investors often look at a metric called the price-to-earnings (P/E) ratio, which compares what corporate shares are trading at, relative to the company's earnings. P/E ratios exist for individual stocks, of course, but they can also be calculated for an overall industry or sector. An average of the P/E ratios of companies within that sector, this measure can help put an individual stock's performance in perspective, compared to its peers. It's also useful in asset allocation and portfolio diversification.

Let's look at the P/E ratio for the retail sector—that is, retail stocks of companies in the business of distributing or selling goods and services to consumers.

Key Takeaways

  • The price-to-earnings (P/E) ratio is a valuation metric that measures a firm's stock price relative to its earnings.
  • Investors review the P/E ratio to determine if a company's stock price is undervalued or overvalued.
  • The retail sector is divided into seven categories: automotive, building supply, distributors, general, grocery and food, online, and specialty lines retail companies.
  • The current P/E ratio for the retail sector, an average of the subsectors' ratios, is 64.65 (current as of January 2021).
  • The average trailing P/E ratio for the retail industry in January 2021 was 22.70.

What Is the Price-to-Earnings Ratio?

But first, some background. The price-to-earnings (P/E) ratio, sometimes referred to as the "multiple," measures a company's share price compared to its earnings per share (EPS). The P/E is commonly used in fundamental analysis as a valuation metric. Analysts and fundamental investors use it to determine whether a company's stock price is appropriate compared to the earnings per share (EPS) generated by the company.

If a company has a high P/E ratio, investors are willing to pay a premium price for its stock compared to its earnings. For example, ABC company has a P/E ratio of 12. Therefore, an investor is willing to pay $12 for every dollar of earnings. A ratio of 2 means that an investor is willing to pay $2 for every dollar of company earnings.

Generally, high P/E ratios indicate that a company's stock is overvalued, whereas low P/E ratios indicate that a company's stock is undervalued. The P/E ratio alone does not provide a holistic view of the value of a company's stock. This ratio along with other metrics and research can enable investors to make sound, educated decisions about a company's stock value.

Different industries may calculate their earnings differently and at different times, and so comparing P/E ratios for companies in different industries may not be suitable.

Understanding the Retail Sector's Average P/E Ratio

The New York University Stern School of Business publishes P/E data for different industries, including the retail industry. The retail sector is divided into seven categories: automotive, building supply, distributors, general, grocery and food, online, and specialty lines retail companies.

Both the categories and the companies within them are highly varied. The roster of firms includes large-cap stocks, such as Walmart (WMT), Costco Wholesale (COST), Dollar Tree (DLTR), and The Home Depot (HD), which trade on the major exchanges. But it also includes smaller stocks that trade over-the-counter, like Dougherty's Pharmacy, Inc. (MYDP), California Grapes International (CAGR), The Bon-Ton Stores, Inc. (BONT.Q), and Meso Numismatics (MSSV).

According to NYU's Stern School, as of January 2021 and using trailing 12-month data, the average trailing P/E ratio of the retail sector is 22.70. This value ranges from a low of 14.41, which is the average of grocery and food retailers, to a high of 140.11, which is the average of building supply retailers.

In addition, as of January 2021, online retail companies have an average trailing P/E ratio of 131.27, automotive retailers have an average of 17.52, general retail companies have an average of 22.70, grocery and food retail companies have an average of 14.41, retail distributors have an average of 138.44, and specialty lines retail companies have an average P/E ratio of 55.99.

Calculating the P/E Ratio of the Retail Sector

The average P/E ratio of the retail sector is calculated using the arithmetic mean average. You add up all the P/E ratios of each individual subsector, then divide by seven (the number of categories), to calculate it.

Take, for example, the retail sector's current P/E ratio (as of January 2021). First, total the individual P/E ratio of each subsector:

Retail Category Current P/E Ratio
Automotive 30.46
Building Supply 152.69
Distributors 41.38
General 23.23
Grocery and Food 40.60
Online 133.68
Specialty Lines 30.51
Source: NYU Stern School of Business

The total comes to 452.55. Divide this by seven, and you get 64.65—the average current P/E ratio for the retail sector overall.