PE ratio stands for price-to-earnings ratio.
To get the PE ratio, you
-take the price of the share
-divide it by the earnings (per share)
What this tells you is how high the price of a stock is when compared to the money it is earning.
PE ratio is used by many investors to determine if a stock is overvalued or undervalued.
But there is no 'right' level. It varies from investor to investor.
The PE ratio of companies in same industries are usually similar.
For example, companies from the infra sector will likely have similar PE ratios. Banking sector companies' PE will be similar. And so on.
This is where the concept of sector PE ratio comes in.
They calculate the PE ratio of an entire industry or sector (infra, pharma, banking, etc).
Based on that, they can look at individual stocks and decide if the PE ratio is too high or too low.
Example:
The sector PE ratio of IT stocks is 25.
So, when an investor sees an IT company stock’s PE ratio being 20, he/she might say that the stock is undervalued in comparison to the sector.
The sector PE ratio of energy stocks is 15.
So, when an investor sees an energy stock’s PE being 20, he/she might say that the stock is overvalued.