The price-to-earnings ratio (P/E ratio) is the most widely used valuation metric in share investing. It tells you how much you are paying for each dollar of a company’s annual earnings. A P/E of 20 means you are paying $20 for every $1 the company earns per year. Understanding P/E ratios helps you assess whether a share might be expensive or cheap relative to its earnings — though it is one tool among many and should never be used in isolation.
How to Calculate the P/E Ratio
$$\text{P/E ratio} = \frac{\text{Share price}}{\text{Earnings per share (EPS)}}$$
Example:
- CBA share price: $120
- CBA earnings per share: $6.00
- P/E ratio = 120 ÷ 6 = 20×
This means investors are paying $20 for every $1 CBA earns per year.
Trailing vs Forward P/E
Trailing P/E — uses actual earnings from the past 12 months (reported results). This is what most financial data websites display by default.
Forward P/E — uses analyst estimates of future earnings (next 12 months). More useful for growth companies but relies on earnings forecasts that may prove inaccurate.
How to Interpret the P/E Ratio
There is no single “correct” P/E — what is reasonable depends on the company, sector, and market context.
General reference ranges for ASX shares:
| P/E range | Typical interpretation |
|---|---|
| Below 10× | Potentially cheap — may be value, or may reflect genuine business problems |
| 10–15× | Modest valuation — typical for slow-growth, mature businesses |
| 15–25× | Moderate — typical for quality businesses with steady growth |
| 25–40× | Growth premium — market expects above-average earnings growth |
| 40×+ | High growth premium — typical for technology/healthcare growth stocks |
| Negative | Company is currently loss-making |
ASX sector P/E benchmarks (approximate):
| Sector | Typical P/E range |
|---|---|
| Banks (CBA, NAB, WBC, ANZ) | 12–20× |
| Materials (BHP, RIO) | 8–15× (cyclical — varies widely) |
| Consumer staples (WOW, COL) | 20–30× |
| Healthcare (CSL, RMD) | 30–55× |
| Technology (PME, WTC, XRO) | 50–100×+ |
| REITs | Often expressed as price-to-funds from operations (PFFO) instead |
Why High P/E Stocks Are Not Necessarily “Overpriced”
A P/E of 60× sounds expensive compared to a bank at 15×. But if the technology company is growing earnings at 25% per year, its earnings will double every 3 years — making the 60× P/E much more reasonable when viewed over 5–10 years.
This is why growth companies trade at higher P/E ratios: investors are paying for future earnings, not just current earnings.
Conversely, a mining company at 8× P/E during a commodity boom might actually be expensive if commodity prices are about to fall and earnings will halve next year.
Limitations of P/E Ratio
- No context without growth — P/E must be paired with earnings growth to be meaningful (see PEG ratio)
- Earnings quality — accounting choices can inflate or deflate reported earnings, making two companies with the same P/E not truly comparable
- One-off items — large one-time gains or write-downs distort EPS and therefore P/E
- Cyclical industries — P/E is least useful for mining stocks; a low P/E at the peak of a commodity cycle can mean the stock is actually expensive
- Loss-making companies — P/E cannot be calculated when earnings are negative
The PEG Ratio — Growth-Adjusted P/E
The PEG ratio adjusts P/E for earnings growth:
$$\text{PEG} = \frac{\text{P/E ratio}}{\text{Earnings growth rate (%)}}$$
A PEG of 1.0 is generally considered fair value — you are paying 1× the growth rate. A PEG below 1.0 may indicate undervaluation relative to growth; above 1.0 may indicate the growth is already fully priced in.
Example: P/E of 30×, earnings growth of 25% per year → PEG = 30 ÷ 25 = 1.2 (slightly above fair value)
Related Articles
- EPS Explained
- How to Analyse an ASX Company
- Growth vs Dividend Shares
- ASX 200 Explained
- ASX Shares hub
- Investing hub
Frequently Asked Questions
What is a good P/E ratio for ASX stocks? There is no universal “good” P/E. A P/E of 15× might be expensive for a cyclical miner but cheap for a quality technology company growing at 25% per year. Always compare P/E to the company’s historical P/E, sector peers, and expected earnings growth rate — not just an abstract number.
What P/E does the ASX 200 index trade at? The ASX 200 historically trades between 14× and 22× earnings, with the median around 17–18×. This varies with market conditions — during low-interest-rate periods (2020–2021) valuations expanded; rising rates (2022–2023) compressed them. Current data is available via financial news services and your broker platform.
Is a low P/E always better? No. A low P/E can indicate genuine value — or it can be a “value trap” where a company is cheap because its earnings are declining or its business model is structurally challenged. Buying a company only because it has a low P/E without understanding why it is cheap is a common investing mistake.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.