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Chapter 7. Ratio Analysis > Interpreting Industry Averages and Trends

Interpreting Industry Averages and Trends

Evaluating a ratio that describes a particular company in terms of the industry average for that ratio can be informative, but it can also be misleading. Consider one commonly reported indicator, the Price/Earnings (P/E) ratio.

Suppose that you know, from examining stock exchange tables in the newspaper or online or from some other source, that the P/E is 10 for a communications firm that you have some interest in. This means that stock in the company presently sells for 10 times its earnings. Perhaps you also know, by information obtained from a commercial service that the average P/E for the telecommunications industry is 15. At first glance, 10 looks like a good P/E, compared to the industry average: in terms of earnings, it is only two-thirds as expensive as other such stocks.


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