The Russell 2000’s Price to Earnings Ratio is Higher Than You Think

The Russell 2000’s Price to Earnings Ratio is Higher Than You Think

In what will likely come as a shock to many investors, the price to earnings ratio of the companies in the Russell 2000 index of small-cap stocks has been shown to be much higher than normally reported. Most publications that report the Russell 2000’s P/E ratio apparently fail to take into account the earnings of companies that are losing money, since they have negative P/E ratios. Unfortunately, one-third of the companies within the Russell 2000 are losing money, so a large swath of companies are not being counted.

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One analyst who decided to sum the market capitalization of the Russell 2000’s companies and compare it to the last 12 months’ earnings found that the true P/E ratio of the Russell 2000 was 78.7. That is a staggeringly-high figure, far higher than the 25.6 reported by FTSE, the Russell Index’s creator. Other sources stated that the Russell 2000’s P/E ratio was as high as 87.9. Those ratios for the Russell 2000 are far higher than they were even during the peaks of the dot-com bubble and the housing bubble.

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That’s yet another indicator that stock markets are incredibly overvalued. Investors who want to minimize their exposure to a stock market crash should keep an eye on that P/E ratio and begin to diversify their portfolios as soon as they can.