How to I calculate the average P/E of a particular industry?

Need help on company to industry analysis?

• I am doing a fundamental analysis for a indsutry and then comparing industry analysis with a company.? My querry is: 1) I have taken randomly 3 firms form a industry. Now if i have to calculate profitablity or investment valuation ratios should i take the average of 3 firms or calculate ratio’s for the 3 firm’s and then take the averages ? Example: Indsutry = Mock Company = A, B & C. Now to calculate Profit margin ratio 1) Should i take sum of net profit after tax of all the firms and divide by sum of Sales of all the firms? Or 2) Should i take average of net profit after tax of all the firms and divide by average of Sales of all the firms? Or 3) Calculate ratio’s for all the firms and then take the average of these ratios?

• Answer:

  industry analysis enables you to get an accurate picture of the industry. this industry depends on underlying firms. so to analyse the industry and comparing with a company involves the following steps. 1. first list all the firms within the industry. dont take samples and list all the firms in it as every firm has the potential to affect the industry. 2. then find the sales, profit, ratios of every firm and list them under the industry. 3. if u take the average of the list, then u will get the industry average. 4. compare the performance of each and every firm with the industry average so that u can identify underperforming and outperforming firms within that industry alone. 5. calculate the net profit margin of all the firms and then take its average. this is more simple than adding all profits and dividing it by the sum of sales. this will help u to analyse independant firms. 6. the ratios should be calculated individually and then the average should be calculated. these are the steps in industry analysis.