Is a PE of 20 Expensive?
This might be the most frequently asked question by beginners. The answer is: it depends on what company you're looking at.
A PE of 20 for a bank stock might be extremely expensive. But a PE of 20 for a fast-growing tech company might be incredibly cheap. Understanding this distinction is the first step toward mastering valuation.
PE Ratio: How Many Years to Earn Back Your Investment?
PE = Stock Price ÷ Earnings Per Share. A PE of 20 means: at current earnings, it takes 20 years to earn back your investment. Think of it as the 'payback period.'
"PE is just a snapshot value. What matters is the company's future earnings, not its past earnings."
| Company | PE Ratio | Meaning |
|---|---|---|
| Bank of China | ~5x | Market expects low/no growth |
| Moutai | ~30x | Market expects stable long-term growth |
| Tesla | ~60x | Market expects explosive future growth |
| A loss-making startup | N/A | No earnings = PE is meaningless |
PB Ratio: What's the 'Liquidation Value'?
PB = Stock Price ÷ Book Value Per Share. A PB of 1 means the market values the company at exactly its net assets. Below 1 means the market thinks the company is worth less than its parts.
PB is most useful for asset-heavy industries (banks, real estate, mining). For tech companies, PB is often meaningless because their real value is in intangible assets — brand, technology, and talent.
PEG: The Growth-Adjusted PE
PEG = PE ÷ Annual Earnings Growth Rate. Peter Lynch popularized this metric. The idea: a company growing at 30% with a PE of 30 (PEG=1) is fairly valued. Growing at 30% with a PE of 15 (PEG=0.5) is a bargain.
💡 PEG Quick Reference
- PEG < 0.5 → Potentially undervalued (if growth is sustainable)
- PEG ≈ 1.0 → Fairly valued
- PEG > 2.0 → Potentially overvalued (market is too optimistic)
- PEG only works for companies with stable, predictable growth
- Cyclical companies (steel, airlines) should NOT use PEG
💡 Valuation Metrics Summary
- PE tells you the payback period — but future earnings matter more than past
- PB measures liquidation value — most useful for asset-heavy industries
- PEG adjusts PE for growth — a PE of 50 with 50% growth rate is fair
- No single metric tells the whole story — use them together
- Duan Yongping: 'I don't look at PE in isolation. I look at the business.'