When markets are on a rollercoaster, the P/E 10 ratio can be your seatbelt. In 2025, with Australian shares swinging between optimism and caution, understanding this valuation metric is more important than ever.
What is the P/E 10 Ratio—and Why Does It Matter in 2025?
The P/E 10 ratio, also known as the cyclically adjusted price-to-earnings (CAPE) ratio, smooths out short-term earnings volatility by dividing a share price by its average earnings over the past decade. This approach, made popular by economist Robert Shiller, helps investors see through temporary booms and busts—and in 2025, with economic headwinds and record corporate profits colliding, it’s a powerful tool for those seeking sustainable value.
Unlike the standard P/E, which can be distorted by one-off events (think: COVID-era stimulus, commodity windfalls, or inflation spikes), the P/E 10 ratio aims to reflect a company’s true earning power. This makes it a favourite among seasoned investors and financial planners looking to avoid buying into hype—or panic.
Real-World Examples: Australian Shares and the P/E 10 in Action
Let’s look at how the P/E 10 ratio is shaping investment conversations in 2025:
- ASX 200: As of Q2 2025, the ASX 200’s P/E 10 ratio sits around 21.7, higher than its 30-year average of 17.5. This suggests the broader market is somewhat expensive by long-term standards, even as mining and energy profits prop up headline earnings.
- Banks & Financials: Major banks like Commonwealth Bank and NAB, which saw record profits in 2023-24, now show a P/E 10 ratio well above their historical average. This is prompting some analysts to warn of potential overvaluation—especially with RBA rate cuts likely to squeeze margins later in the year.
- Tech & Growth Stocks: Fast-growing tech names, which often have wild swings in annual earnings, look more reasonably valued when assessed with a P/E 10 lens. For example, WiseTech Global’s standard P/E of 55 looks steep, but its P/E 10 brings it closer to 40, reflecting rapid but sustainable earnings growth.
These examples show why the P/E 10 ratio is gaining traction among Australian investors—especially those wary of short-term noise.
Policy Updates and Economic Trends: Why P/E 10 Is Gaining Ground
Several 2025 trends are pushing the P/E 10 ratio into the spotlight:
- Superannuation Funds: The ATO’s 2025 guidelines now encourage super funds to disclose long-term valuation metrics, including P/E 10, to help members understand their investment risk.
- ASIC Guidance: Following concerns about “greenwashing” and speculative bubbles, ASIC’s 2025 investor education campaign highlights the P/E 10 ratio as a best-practice tool for retail investors assessing ETF and managed fund valuations.
- Economic Cycles: With the RBA signaling a shift to a neutral cash rate and GDP growth slowing, many economists expect a return to more normalised earnings growth after a period of outsized profits. The P/E 10 is seen as a way to cut through the noise and focus on sustainable returns.
These policy moves and economic shifts make the P/E 10 ratio especially relevant for anyone thinking long-term—whether you’re managing your own portfolio or reviewing your super fund’s disclosures.
How to Use the P/E 10 Ratio in Your Portfolio Strategy
Ready to put the P/E 10 ratio to work? Here’s how Australian investors are integrating it into their strategies in 2025:
- Market Timing: Some use the P/E 10 to gauge whether the market is expensive or cheap compared to history. A ratio well above average can signal caution; a low ratio may indicate opportunity.
- Sector Selection: Comparing the P/E 10 across sectors can help identify undervalued industries, especially as economic conditions shift. For instance, healthcare and infrastructure currently trade at lower P/E 10 ratios than tech or banks.
- Risk Management: By focusing on long-term earnings, investors can avoid chasing fads or panicking during downturns. This supports steadier, more disciplined portfolio construction—vital in a year when volatility remains a theme.
Remember, the P/E 10 is just one tool in the kit. Combine it with other indicators—like dividend yield, debt levels, and macroeconomic trends—for the clearest view.
Conclusion: The P/E 10 Ratio—A Timely Metric for 2025
With markets more complex than ever, the P/E 10 ratio offers Australian investors a practical way to cut through the hype and focus on what matters: sustainable, long-term value. As super funds, regulators, and financial planners embrace this metric in 2025, now is the time to sharpen your analysis and make smarter, more confident investment decisions.
