Blue Line - The Normal P/E Ratio - What It Is and How It Works
The blue normal P/E ratio line is telling you what valuation the market has normally applied to the stock for the period that you are graphing. It does not necessarily indicate that the stock is fairly valued or undervalued, instead, it provides information regarding how the market had most commonly valued the stock over the timeframe being graphed.
It’s important to understand that the normal P/E ratio is a dynamic calculation that can, and will, change when different timeframes are graphed. Therefore, each time you change timeframes, be sure to check the blue FAST FACTS rectangle and note the multiple that the normal P/E ratio is being drawn at.
However, you need to understand that does not necessarily mean that the stock is fairly valued if it trades on that line. In other words, it’s simply a piece of information telling you how the market normally prices the stock. On cases when the normal P/E ratio (the blue line) is way above fair value, it represents an indication that the market normally applies a premium valuation, and vice-versa.
We get a lot of questions about what we call Normal P/E Ratio on a FAST Graph. People want to know how it is calculated, what it means, and how to utilize it to make better long-term investment decisions. In this video we will explain how the Normal P/E (the average market P/E) is calculated and how it should be analyzed and thought about.
Updated 8 months ago