Historical P/E tells you what investors paid before—not what they must pay now
A historical P/E range can reveal whether today's multiple is high or low relative to a company's own past. It becomes useful only after asking whether the business, earnings regime and market environment are comparable.
Mean, median and range
The average can be pulled by extreme observations. Median and percentile ranges can show the centre and distribution more clearly. Always inspect the observations behind the statistic.
The biggest trap: changing earnings
A cyclical company can appear cheapest on P/E near peak earnings and most expensive near trough earnings. The multiple may therefore move in the opposite direction to economic attractiveness.
Normalised earnings
When earnings are temporarily abnormal, consider a sustainable or normalised earnings estimate. Make the adjustment explicit rather than quietly changing the denominator.
Why a company deserves a new multiple
Growth, margins, competitive position, capital efficiency, leverage, business mix and governance can change. A structurally better company may deserve a higher multiple; a structurally weaker one may deserve less. The reason must be evidenced, not assumed.
Worked framework
Suppose the historical median P/E is 25× and today's is 20×. The 20% discount is a fact relative to that chosen median. Whether it is attractive depends on why the multiple is lower and whether earnings are comparable.
Checklist
- Consistent earnings definition
- Normalised earnings considered
- Median and range reviewed
- Business changes identified
- Current premium/discount explained