The P/E ratio compares a share price to its earnings per share; the PEG divides P/E by growth to account for fast growers. Enter price, EPS and growth to get both.
A high P/E is not automatically expensive — investors may be paying for growth. A PEG near 1 is the classic rough benchmark for fairly priced growth.
Ratios only make sense against peers in the same sector and with consistent earnings; one-off charges distort EPS.
Which earnings figure is used changes the answer materially. A trailing P/E uses the last twelve months of reported earnings; a forward P/E uses estimates for the next twelve. In a recovering business the forward number can be half the trailing one, so a comparison that mixes the two is not a comparison at all.
The ratio is undefined when earnings are zero or negative — not a rounding problem but the normal state of early-stage companies and of cyclical ones at the bottom of a cycle. Where P/E cannot be computed, price-to-sales or price-to-book carry the comparison instead.
The inverse is often the more intuitive framing. A P/E of 20 is an earnings yield of 5%, which can be compared directly against a bond yield or a savings rate — and that comparison is what makes a high multiple look defensible when rates are low and expensive when they are not.
Frequently asked questions
What is a good P/E ratio?
There is no universal number: broad markets have historically averaged roughly 15–20, but fast growers deserve more and shrinking businesses less. Compare within a sector, not across sectors.
What is the PEG ratio?
P/E divided by expected earnings growth. It normalizes valuation for growth — a PEG near 1 is the classic rough benchmark for fairly priced growth.
What is earnings yield?
The inverse of P/E: earnings per share divided by price. A P/E of 20 is a 5% earnings yield, which you can compare directly against bond yields.