Also, P/E stands for Price Per Share/Earnings per Share. How does one evaluate whether the P/E is too high or too low for that certain industry?

Tip: If you look at analyst reports, they generally will give you a list of comparable companies for that theme (For eg. Chinese Internet companies), they will give you the current P/Es for the comparable companies (eg. Alibaba, Tencent etc).

Of course, they generally will provide commentary on whether the company trading at higher multiples compared to peers is justified. This could be a function of many things - some examples including:

• Brand value, allowing them to command a premium
• Network effect
• Benefits from economies-of-scale, leading to consistently higher margins compared to peers
• Etc.

1. Find out what is the 10Y (for example) historical PE for a particular benchmark that you believe is representative of the market. For example, if you believe that S&P 500 is representative of the total US market/economy. Find out what is the 10Y average PE for the S&P 500 index
2. All the 500 companies in the S&P 500 index can be broken into the different sector classification. Each sector/industry have their own characteristics such as earnings potential, revenue growth, average debt etc. Therefore, each sector would have its own average PE ratio that is associated to their own unique characteristics.
3. For example, if the 10Y average PE for the S&P 500 is 23 and for the technology sector, the 10Y average PE is 30 and the 1Y average PE is 50. From this example, you can make a certain inference that the PE is getting too high based on the past 1Y data when compared against the 10Y average, ie 50 vs 30.
4. Note that by looking at the average PE for one time period across different sector classification, you cannot really tell whether if the PE is considered high for a certain industry. You have to look across different time periods and economic cycle.

Hope this answer your question.
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