"Is 20x P/E Expensive?"

Step 1: PEG Ratio

PEG Ratio = P/E Ratio / EPS Growth Rate (%)

Company A: PEG Ratio = 20.0x / 25% = 0.80x

Company B: PEG Ratio = 20.0x / 5% = 4.00x

The PEG ratio adjusts the P/E multiple for the growth rate behind it, so a PEG near 1.0x is often read as "fairly priced" relative to growth, while a PEG well below 1.0x (Company A) suggests the market may actually be underpaying for that growth, and a PEG well above 1.0x (Company B) suggests investors are paying a steep premium for very little growth. It's the fastest gut-check analysts use before running a full valuation.

Step 2: P/E Relative to Industry

Relative P/E = Company P/E Ratio / Industry Average P/E Ratio

Company A: Relative P/E = 20.0x / 28.0x = 0.71x (a 29% discount to its own industry)

Company B: Relative P/E = 20.0x / 16.0x = 1.25x (a 25% premium to its own industry)

This step matters because software companies structurally trade at higher multiples than utilities. Comparing Company A's 20x directly to Company B's 20x without adjusting for industry norms would miss that Company A is actually cheap for its sector, while Company B is expensive for its sector, even though both show the same headline number.

Step 3: The Interest Rate Environment

Company A's value is weighted toward earnings many years out, since most of its 25% (0.25) growth compounds in future periods; Company B's value is weighted toward earnings in the near term, since its 5% (0.05) growth adds relatively little over time. Discounting future cash flows at a higher risk-free rate reduces the present value of distant cash flows more than it reduces the present value of near-term cash flows — the same duration effect that makes long-dated bonds more rate-sensitive than short-dated ones.

As the risk-free rate rose from 2% (0.02) to 5% (0.05), Company A's justified multiple should have compressed more than Company B's, all else equal — even though today's table shows them at the same 20.0x. If Company A's multiple hasn't compressed as much as the math implies, that's a signal to dig into whether the market is still pricing in unusually strong growth assumptions, or simply mispricing the rate sensitivity.

Final Results

• Company A PEG Ratio: 0.80x
• Company B PEG Ratio: 4.00x
• Company A Relative P/E: 0.71x (29% discount to industry)
• Company B Relative P/E: 1.25x (25% premium to industry)

The headline "20x P/E" told you almost nothing on its own — once you adjust for growth (PEG), industry norms (Relative P/E), and rate sensitivity, the same number describes a statistically cheap, high-growth software company and an expensive, low-growth utility. This is the same three-part framework — growth, peer context, and discount-rate sensitivity — that underpins how multiples get justified in a full comparable company analysis or DCF.

Would you like to walk through how a further 100bps rate increase would mechanically shift each company's "fair" P/E under a simple Gordon Growth-style multiple?