The price to earnings ratio is one of the most common metrics used by investors to analyze whether investment in a company is worthwhile. The P/E ratio formula is expressed as a company’s price per share divided by its earnings per share (EPS) and is stated as a number, not a percentage.
Investors interpret the price per earnings ratio as the price they are willing to pay for each dollar of a company’s earnings. For example, if a company’s stock was trading at $50 per share and had earnings of $5 per share, its P/E ratio would be 10. This metric is not the same for each industry or between similar companies, but on average, the P/E ratio ranges from 15 to 25 for profitable businesses.
Average P/E Ratio for the Financial Services Industry
The financial services industry makes up a sizable portion of the U.S. gross domestic product (GDP). As such, it has been of interest to growth investors for years. Companies that operate within the industry include those focused on brokerage operations, conventional banking, asset management, and debt and credit services. Because the financial services industry plays an important role in the overall performance of the markets, investors should be concerned with the average P/E ratio of this sector.
As of February 2015, the average P/E ratio of the financial services industry is 18.60. This metric includes the sector averages of specific financial service categories, including investment brokerage operations with a P/E ratio of 19.60, credit services with a P/E ratio of 20.40, and savings and loans institutions with a P/E ratio of 18.20. Smaller, higher-risk sectors under the purview of the broader financial services category have the highest P/E, such as the retail REIT industry at 53.90, while larger insurance-focused sectors have a lowest, such as the accident and health insurance sector at 9.60.