What is the Price-Earnings Relative?
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 Does the Price-Earnings Relative Work?
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 Does the Price-Earnings Relative Matter?
The price earnings relative helps to assess whether or not a stock's performance was adequate given overall market performance.
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