Valuation ratios like P/E, P/B and PEG are price tags. They tell you how much you're paying per rupee of profit, book value or growth. A ratio by itself means almost nothing; it becomes useful only in comparison: against the company's own history, and against its sector peers.
If EPS, P/E and book value are new terms, read what are EPS, P/E ratio and book value first. This article assumes those definitions and builds the how to use them layer on top.
What do the ratios say about Kaveri Motors?
Our fictional vehicle maker trades at ₹200 per share, with an EPS of ₹10 and a book value of ₹50 per share:
| Ratio | Calculation | Result |
|---|---|---|
| P/E | 200 ÷ 10 | 20 |
| P/B | 200 ÷ 50 | 4 |
Is a P/E of 20 expensive? On its own, unanswerable. Meera makes two comparisons:
Against its own history. Over the past five years Kaveri Motors has mostly traded between a P/E of 12 and 18. At 20 it is pricier than its own past. The market is expecting something better than usual: faster growth, better margins, or a stronger cycle. If nothing has actually improved, the price is simply more optimistic.
Against its sector. Fictional peers Bharat Auto trade at a P/E of 15 and Deccan Wheels at 25. Kaveri Motors sits in the middle. But the comparison only starts the conversation. The next question is why the gap exists.
What about "expensive for a reason" and "cheap for a reason"?
The most common beginner mistake is treating a low ratio as a bargain and a high one as a rip-off. Markets aren't that careless.
- Deccan Wheels at a P/E of 25 may be expensive for a reason, growing profits 30% a year with the sector's best margins and no debt. Quality and growth command a premium.
- Bharat Auto at 15 may be cheap for a reason, stagnant sales, thinning margins, or heavy debt. A low price tag on a deteriorating business is not a discount; it's a warning label the market has already attached.
A cheap-looking ratio is a question ("what does the market see that I don't?"), never an answer. The same logic drives the growth-vs-value framing in what are growth and value stocks.
How does PEG add growth to the picture?
P/E ignores the very thing buyers pay for: growth. The PEG ratio divides the P/E by the expected annual earnings growth rate (in percent):
- Kaveri Motors: P/E 20, expected growth 20% a year → PEG = 20 ÷ 20 = 1.
- Deccan Wheels: P/E 25, growth 30% → PEG ≈ 0.8. Its higher P/E is more than paid for by growth.
- Bharat Auto: P/E 15, growth 5% → PEG = 3. The "cheap" stock is the priciest per unit of growth.
As a loose convention, a PEG near 1 suggests price and growth are in balance. Its weakness is obvious: the growth number is an estimate, and estimates are wrong all the time. Change Deccan Wheels' assumed growth from 30% to 15% and its PEG doubles.
And when should you not lean on P/E at all? When earnings are depressed, distorted, or drowned in debt and depreciation. That's where what is EV/EBITDA earns its place.
Things to keep in mind
- Never judge a ratio in isolation. Always versus the company's own history and its direct peers, never across unrelated industries.
- Check what's in the "E": one-off gains or losses can make P/E look artificially low or high for a year.
- PEG is only as good as the growth estimate behind it; treat it as a rough cross-check, not a formula.
- A ratio is a price tag, not a verdict, no P/E, P/B or PEG level is by itself a reason to buy or sell.
Read next
What is EV/EBITDA? — A valuation measure that handles debt better than P/E does.