Definition

The Price to Mean Earnings (PE) Ratio Without Non-Recurring Items (NRI) is a financial metric that measures the average valuation of a company's earnings, excluding any one-time or non-recurring items. This provides a clearer picture of the company's ongoing profitability by focusing on its core earnings.

Formula

Mean PE Ratio Without NRI = (Market Price per Share) / (Mean Earnings per Share Excluding NRI)

How to use the valuation method

To use this valuation method, calculate the company's earnings per share (EPS) by excluding any non-recurring items from the net income. Then, divide the current market price per share by this adjusted EPS to obtain the PE ratio. This ratio can be compared to industry averages or historical data to assess whether a stock is overvalued or undervalued.

Which industries it work best in

This method works best in industries with stable and predictable earnings, such as utilities, consumer staples, and large-cap companies, where non-recurring items are less frequent and the core earnings provide a reliable measure of performance.

Which industries it does not apply to and why

Industries with volatile earnings, such as technology startups, biotech firms, or cyclical industries like mining and oil, may not benefit from this method. In these sectors, non-recurring items can significantly impact earnings, and excluding them might not provide an accurate picture of the company's financial health.

Summary

The Mean PE Ratio Without NRI is a useful tool for evaluating a company's valuation by focusing on its core earnings. It is particularly effective in stable industries but may not be suitable for sectors with volatile earnings due to the impact of non-recurring items.