P/E Ratio, ROE, Debt-to-Equity on ASX: Valuation Ratios That Actually Work in Australia
P/E of 10 is cheap in US tech but expensive for ASX banks? ROE of 20% is great for CSL but terrible for a REIT? Context is everything.
Core Idea: Ratios are not absolute - they are relative to sector, history, and Australian quirks like franking, high payout ratios, and resource cyclicality. This guide teaches you ASX-specific thresholds, not US textbook theory.
Part 1: P/E Ratio - Most Misused Ratio on ASX
P/E = Price / Earnings per Share. Tells you how many years of earnings you pay for. ASX average ~16x, but ranges wildly.
| ASX Sector | Typical P/E Range (FY24) | Why This Range? | Trap |
|---|---|---|---|
| Banks (CBA, NAB, ANZ, WBC) | 12x - 18x | Low growth (3-5%), high capital needs, regulated. CBA always premium 18-22x due to quality | P/E 10x looks cheap but could be pre-GFC style bad debt blow-up |
| Miners (BHP, RIO, FMG) | 6x - 15x | Cyclical earnings - peak earnings = low P/E trap. 6x at iron ore $200/t = expensive. 12x at $80/t = cheap | Low P/E at commodity top = value trap |
| REITs (GMG, Stockland, Scentre) | 12x - 25x (or Price/NTA 0.8-1.3x better) | Earnings = rent. P/E less useful than Funds From Operations (FFO) yield and NTA | P/E 15x but NTA discount 20% = cheap |
| Growth Tech (XRO, WTC, REA) | 30x - 80x | High growth 20%+, high margins, global scalability. Market pays for growth | P/E 40x but growth 40% = PEG 1 = fair. P/E 40x growth 5% = expensive |
| Healthcare (CSL, COH, RMD) | 25x - 40x | Defensive, high ROIC, patent moat. CSL always 30x+ | CSL P/E 25x during plasma issues = opportunity |
| Consumer Staples (WOW, WES) | 20x - 30x | Defensive, steady, high ROE. WOW rarely below 20x | WOW P/E 18x during inflation squeeze = buy |
Advanced: Use Forward P/E (next year earnings) vs Trailing P/E (last year). On ASX, forward is better because commodity prices move fast. But forward is broker estimate - can be wrong. Use average of last 3 years earnings (Shiller P/E) for miners to smooth cycle.
Part 2: ROE - The Quality Filter (Return on Equity)
ROE = NPAT / Shareholders Equity. Measures how well management uses your money. Warren Buffett's favourite.
| ROE Level | Meaning on ASX | Example | Sustainability |
|---|---|---|---|
| < 8% | Poor - destroying value, cost of equity ~8-10% in Australia | AMP, Telstra 2018-20, Myer | Avoid unless turnaround with catalyst |
| 8-12% | Average - matches cost of capital | Woolworths, Scentre, AGL | OK if cheap valuation |
| 12-20% | Good - quality business | Wesfarmers 15-20%, Brambles, Transurban | Buy and hold |
| 20-30% | Excellent - moat | REA 35%, CAR Group 25%, CSL 25% | Premium warranted |
| > 30% | Exceptional but check leverage | CBA 14% but with 10x leverage ROE 14% is actually great (banks levered). REA 35% with no leverage = insane quality | Check debt - high ROE from high debt is risky |
ASX Trap: Banks ROE 12-14% looks low vs tech 30%, but banks use 10x leverage (Assets/Equity). So 14% ROE with 10x leverage = ROA 1.4% which is actually excellent for bank. Don't compare bank ROE to REA ROE directly. Compare within sector.
DuPont Breakdown: ROE = Profit Margin x Asset Turnover x Leverage. For ASX:
- Woolworths: Low margin (5%) x High turnover (2x) x Moderate leverage (2x) = 20%? No actually 12% because margin thin.
- REA: High margin (45%) x Low turnover (0.5x) x Low leverage (1.2x) = 27% - quality.
- CBA: Low margin (30% NIM) x Very low turnover (0.05x - assets huge) x High leverage (12x) = 14% - bank model.
Part 3: Debt-to-Equity - The Survival Ratio
D/E = Total Debt / Equity. How much debt vs your money. Higher = higher risk, higher return in good times, death in bad times.
| D/E Level | For Industrials (WES, WOW, CSL) | For Banks (CBA, NAB) | For REITs (GMG, SGP) | Action |
|---|---|---|---|---|
| 0-20% (Net Cash) | Fortress - can buy competitors in downturn | Impossible - banks always levered | Very conservative, may be under-levered | Ideal |
| 20-60% | Healthy - normal | N/A - banks 500-800% D/E typical | Low for REIT, 20-30% gearing = low | Good |
| 60-100% | Watch - interest cover must >4x | N/A | 30-40% gearing = normal for REIT | OK if cash flow stable |
| 100-200% | High - risky unless utility/REIT | N/A - actually banks 600% = normal (deposits = debt) | 40-50% gearing = high for REIT, risky if rates rise | Caution |
| >200% | Danger - equity wipeout risk | Banks 600-1000% but regulated by APRA CET1, not D/E | >50% gearing REIT = danger - Stockland, Mirvac watch | Avoid / Deep dive |
Better metric for ASX: Net Debt / EBITDA and Interest Cover (EBIT / Interest). For BHP, Net Debt/EBITDA <1x excellent. For CBA, CET1 ratio >10.5% is what APRA watches, not D/E.
Part 4: Case Study - P/E, ROE, D/E in Action - CSL vs BHP vs CBA (2024)
| Metric | CSL (Healthcare) | BHP (Miner) | CBA (Bank) | Interpretation |
|---|---|---|---|---|
| P/E (trailing) | 32x | 9x | 22x | CSL expensive but quality, BHP cheap due to peak iron ore fear, CBA premium |
| ROE | 24% | 28% | 14% | All high - but BHP ROE inflated by high iron ore price (cyclical), CSL sustainable, CBA levered |
| Debt/Equity | 55% | 25% | 750% (but CET1 12.2%) | CSL moderate after acquisitions, BHP low (conservative), CBA normal for bank |
| Dividend Yield + Franking | 1.3% (30% franked) | 5.8% (100% franked) | 3.8% (100% franked) | Yield: BHP highest but cyclical, CBA stable, CSL low but growth |
| Payout Ratio | 45% | 65% | 70% | All sustainable, BHP payout high due to high earnings |
| Verdict | Hold quality, buy dips <28x | Buy when iron ore <$100, sell >$180 | Hold for dividend, don't expect growth |
Part 5: PEG, EV/EBITDA, Price/Book - ASX Extras
| Ratio | Formula | Best For ASX | Example |
|---|---|---|---|
| PEG | P/E / Growth Rate | Growth stocks XRO, WTC, REA - P/E 40x but growth 30% => PEG 1.3 = fair | XRO P/E 80x growth 25% PEG 3.2 = expensive unless growth accelerates |
| EV/EBITDA | Enterprise Value / EBITDA | Miners, Telcos with different debt levels - compares operating earnings regardless of debt | Telstra EV/EBITDA 7x vs TPG 5.5x - TPG cheaper |
| Price / NTA (or P/B) | Price / Net Tangible Assets | Banks, REITs, LICs - CBA P/B 2.5x premium, NAB 1.6x, ANZ 1.1x discount. REITs Price/NTA 0.9-1.2x | REIT trading at 0.8x NTA = 20% discount - potential buy |
| Dividend Yield + Franking Gross-Up | Yield / (1-tax) + franking | Australian dividend investors - CBA 3.8% fully franked = gross 5.4% (3.8/0.7) | WOW 4% fully franked = 5.7% gross - beats term deposit 4.5% |
Part 6: Common Mistakes Australians Make
- Comparing P/E across sectors: CBA P/E 22x vs BHP 9x - doesn't mean BHP cheaper. Different business cycles.
- Ignoring franking: BHP yield 5.8% franked = 8.2% gross. US stock 5.8% yield = 5.8% gross. Franking adds 2-3% extra return.
- ROE without debt check: Company with 40% ROE but D/E 300% = time bomb. Check interest cover.
- Using P/E for miners at peak: FMG P/E 5x at iron ore $200 = trap. At $200, earnings peak, next year earnings halve, P/E becomes 10x.
FAQs
What is good P/E for ASX 200?
Historically 14-16x average. Below 14x market cheap, above 18x expensive. Currently ~16-17x (2024). But for your stock, compare to its own 5-year average and sector, not market.
Is high debt always bad on ASX?
No. Banks and REITs need debt. Goodman Group gearing 25% = uses debt to buy industrial properties returning 6-7% while debt costs 4% = positive spread. Problem when gearing >40% and rates rise.
Where to find these ratios for ASX?
CommSec, Yahoo Finance, Market Index, Simply Wall St, Morningstar. But verify with annual report - data providers sometimes use adjusted earnings.
Disclaimer: Ratios are tools, not decisions. Combine with business quality. Not financial advice.