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.
How it is constructed (step-by-step)
- Select peers: gather up to 10 peer tickers and exclude the target company.
- Fetch data: for each peer read
trailingPEandmarketCap. - Initial filter: keep only peers with a numeric
trailingPE> 0 (drop negative, zero, or missing values). - Minimum peers: if fewer than three valid peers remain, fall back to a precomputed sector-average P/E.
- Outlier removal (IQR): compute Q1 and Q3 of the peer P/E list, set IQR = Q3 - Q1, then exclude peers with P/E > Q3 + 2.5 * IQR or P/E < Q1 - 1.5 * IQR.
- Compute measures:
weighted mean P/E=median P/E= median of the peer P/E values
- Final value: take the maximum of the weighted mean and the median as the industry average P/E.
- Return value: the function returns an object containing
industryAvgPE, peer market caps/details, and asuccessflag; when insufficient data is available it returns the sector fallback andsuccess:false.
Rationale
The weighted mean reflects market structure (larger firms have more influence), the median protects against extreme values, and taking the larger of the two reduces the chance of underestimating typical industry valuations when large caps dominate.