Industry Average P/E: Definition, Formula, and How It Is Calculated
A single P/E number that represents the typical price-to-earnings valuation for a company's peer group. Used by the Trading Multiples (TMV) method to translate an industry valuation into a per-share fair value. Includes peer filtering and outlier handling.
How it is constructed
Final value is the maximum of weighted mean P/E and median P/E. Uses up to 10 peers with outlier removal via IQR method. Falls back to sector average if fewer than 3 valid peers remain.
Notes
- Select up to 10 peers and exclude the target company.
- Keep only peers with numeric trailing P/E > 0 (drop negative, zero, or missing values).
- Use outlier removal (IQR) to exclude extreme P/E values.
- Weighted mean reflects market structure; median protects against extreme values.
- Taking the maximum of weighted mean and median reduces underestimation when large caps dominate.
- Falls back to precomputed sector-average P/E if insufficient valid peers.
Why it matters
Industry Average P/E provides a market-based benchmark for valuation. By comparing a company's P/E to its peer group, investors can determine if a stock is trading at a premium or discount relative to its industry. This metric is fundamental to relative valuation and multiples-based approaches.