P/E vs P/BV vs PEG – Which Metric is Best for Analyzing Stock

What Do P/E, P/BV, and PEG Ratios Mean?

• P/E Ratio (Price to Earnings Ratio)

The P/E ratio indicates how much investors are willing to pay for every 1 unit of a company's earnings per share (EPS). It’s calculated by dividing the stock price by EPS. This ratio is commonly used to assess whether a stock is considered cheap or expensive relative to its current earnings.

• P/BV Ratio (Price to Book Value Ratio)

The P/BV ratio compares a stock’s market price to its book value per share, which represents the net asset value of a company. This ratio is especially useful for evaluating companies with substantial physical assets, such as those in banking, real estate, or energy sectors.

• PEG Ratio (Price to Earnings Growth Ratio)

The PEG ratio combines a company’s P/E with its earnings growth rate by dividing the P/E by the projected earnings growth. It is most suitable for analyzing growth stocks, as it helps assess whether the stock price is justified by future profit potential.

When Should You Use P/E, P/BV, or PEG to Analyze Stocks?

For investors focusing on growth stocks—such as tech companies or businesses with steadily increasing earnings—the PEG ratio offers a clearer picture than using the P/E ratio alone. That’s because a stock may have a very high P/E (making it appear expensive), but if its PEG is still low, it suggests that the stock could still be undervalued relative to its growth potential.

On the other hand, investors looking for value stocks—those trading below their book value or with stable earnings, such as banks or energy companies—may find P/E and P/BV ratios more useful. The P/E ratio helps assess whether the stock is fairly priced based on its earnings, while the P/BV ratio indicates whether the stock is trading below the value of the company’s actual assets.

Ultimately, the best approach is to choose the right metric based on the type of stock and your investment strategy. Each ratio serves a different purpose, and using them appropriately can help guide smarter investment decisions.

Strengths and Weaknesses of Each Valuation Metric

• P/E Ratio is simple and easy to understand, making it useful for analyzing companies with consistent earnings. It helps investors gauge whether a stock is expensive or cheap relative to its profits. However, it’s not suitable for companies that are unprofitable or have highly volatile earnings, as the resulting value can be misleading.
  
  
• P/BV Ratio is best suited for companies with significant tangible assets, such as banks, utilities, or real estate firms. It helps assess whether a stock’s market price is justified when compared to the company’s net asset value. However, for asset-light businesses like tech firms, the P/BV ratio may not accurately reflect their true value since their core value often lies in intangible assets like innovation, intellectual property, or brand strength.
  
  
• PEG Ratio offers a forward-looking perspective, making it ideal for evaluating high-growth stocks. A PEG ratio below 1 often suggests the stock is still attractively valued relative to its growth potential. However, it relies on projected earnings growth, which can be uncertain and subject to frequent revisions, so it should be used with caution and in context.

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Example of Stock Analysis Using P/E, P/BV, and PEG Ratios

Before calculating P/E, P/BV, or PEG ratios, investors should understand the following key concepts:

• • Earnings Per Share (EPS): This is the company’s net profit divided by the number of outstanding common shares. It reflects how much profit the company earns per share over a specific period.
  • Book Value per Share: This represents the company’s net asset value, calculated by subtracting total liabilities from total assets, then dividing the result by the total number of common shares. It indicates the value of the company’s tangible assets per share.

Example:

Let’s say you’re evaluating “Stock A,” which belongs to the technology sector—perhaps a company that develops cloud-based applications or digital services. The company has shown strong earnings growth over the past 3 to 5 years.

• • Current stock price: USD

  • Latest EPS: 5 USD

  • Average annual earnings growth rate: 30%

Calculating the P/E Ratio:

P/E = 200 ÷ 5 = 40

This means investors are willing to pay 40 baht for every 1 baht of the company’s earnings. That’s considered relatively high.

Looking at the PEG Ratio:

PEG = 40 ÷ 30 = 1.33

While the P/E ratio appears high, the PEG ratio of 1.33 suggests the valuation is still reasonable when factoring in the company’s strong growth potential. Generally, investors view a PEG below 1 as a strong buying opportunity, and a PEG between 1 and 1.5 is still considered attractive for growth stocks.

Overall Assessment:

Stock A may seem expensive when looking only at its P/E ratio, but if the company can sustain its 30% annual earnings growth, the current share price might still undervalue its long-term potential. This kind of stock is typically suitable for long-term investors who are comfortable with higher risk in exchange for future growth opportunities.

Next, let's look at "Stock B," which represents a commercial bank.
This is the kind of bank with nationwide branches, and its primary revenue comes from interest income and service fees.

• • Current stock price: $40

  • Earnings Per Share (EPS): $4

  • Book Value per Share: $50

  • Average annual earnings growth rate: 5%

Calculating the P/E Ratio:

P/E = $40 ÷ $4 = 10

This suggests the stock is reasonably priced relative to its earnings, especially compared to the broader market.

Now let’s look at the P/BV Ratio:

P/BV = 40 ÷ 50 = 0.8

This means the stock is trading at a 20% discount to its book value, indicating that investors are able to buy it for less than the company’s net asset value per share. That can be a sign of undervaluation, particularly in the financial sector where assets and liabilities are more transparent.

Calculating the PEG Ratio:

PEG = 10 ÷ 5 = 2.0

A PEG ratio of 2.0 is quite high, suggesting that even though the stock looks cheap based on earnings and book value, its growth prospects are relatively limited. This indicates it may not offer the same future upside potential as a growth stock.

Overall Assessment:

Stock B is likely better suited for income-focused or value investors who prioritize stability and are looking to invest in companies trading below their intrinsic value. While the stock may not deliver aggressive capital gains, it could provide consistent dividend income and long-term value through gradual price recovery. It's a classic example of a "value play" rather than a growth opportunity.

In stock analysis, there is no single “best” metric that works in every situation. Each valuation tool has its own strengths and is best suited for different types of companies. For example, if a company has stable earnings and a solid operating history, the P/E ratio can help assess whether the stock is reasonably priced relative to its profits. For businesses with significant tangible assets—such as banks or real estate firms—the P/BV ratio is more appropriate, as it compares the stock price to the company’s book value. Meanwhile, for companies with rapidly growing profits, such as those in the tech sector, the PEG ratio is useful for evaluating whether the stock price fairly reflects its future growth potential.

That said, investors should avoid relying on a single metric when making investment decisions. A well-rounded analysis should also consider factors like the company’s competitive position, cash flow strength, debt structure, and broader industry trends. Taking these elements into account provides a more complete picture and helps build a stronger, more resilient investment portfolio over the long term.

Note: This article is intended for preliminary educational purposes only and is not intended to provide investment guidance. Investors should conduct further research before making investment decisions.