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.