A P/E ratio, even one calculated using a forward earnings estimate, doesn’t always tell you whether the P/E is appropriate for the company’s expected growth rate. To address this, investors turn to the price/earnings-to-growth ratio, or PEG. One useful way to check if a stock’s PE ratio is reasonable is to also look at a related metric that incorporates the company’s earnings growth rate. The price-to-earnings (PE) ratio is the ratio between a company’s stock price and earnings per share. The most well known example of this approach is the Shiller P/E ratio, also known as the CAP/E ratio (cyclically adjusted price earnings ratio).

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2. A ratio of 10 indicates that you are willing to pay $10 for $1 of earnings.
3. Therefore, the price/earnings to growth (PEG) ratio is a modified version of the price-to-earnings (P/E) ratio, where the earnings growth projections is considered.

P/E vs. Earnings Yield

Analysts and investors use it to determine the relative value of a company’s shares in side-by-side comparisons. By including expected earnings growth, the PEG ratio is considered an indicator of a stock’s true value. And like the P/E ratio, a lower PEG Ratio may indicate that a stock is undervalued. In fact, many investors, strategists and analysts consider a PEG Ratio lower than 1.0 the best. That’s because a ratio lower than 1 suggests that the company is relatively undervalued.

Company

Examples of low P/E stocks can be found in mature industries that pay a steady rate of dividends. Companies with a high Price Earnings Ratio are often considered to be growth stocks. This indicates a positive future performance, and investors have higher expectations for future earnings growth and are willing to pay more for them. The P/E Ratio—or “Price-Earnings Ratio”—is a common valuation multiple that compares the current stock price of a company to its earnings per share (EPS). Since the current EPS was used in this calculation, this ratio would be considered a trailing price earnings ratio.

Calculated by dividing the P/E ratio by the anticipated growth rate of a stock, the PEG Ratio evaluates a company’s value based on both its current earnings and its future growth prospects. The company’s price-to-earnings ratio is 10x, which we determined by dividing its current stock price by its diluted earnings per share (EPS). In addition to indicating whether a company’s stock price is overvalued or undervalued, the P/E ratio can reveal how a stock’s value compares with its industry or a benchmark like the S&P 500. The forward (or leading) P/E uses future earnings guidance rather than trailing figures. The price-to-earnings ratio can also be calculated using an estimate of a company’s future earnings.

Although earnings growth rates can vary among different sectors, a stock with a PEG of less than one is typically considered undervalued because its price is low relative to its expected earnings growth. A PEG greater than one might be considered overvalued because it suggests the stock price is too high relative to the company’s expected earnings growth. The scaled agile business strategy integration price to earnings ratio indicates the expected price of a share based on its earnings. As a company’s earnings per share being to rise, so does their market value per share.

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P/E ratios rely on accurately presenting the market value of shares and earnings per share estimates. Thus, it’s possible it could be manipulated, so analysts and investors have to trust the company’s officers to provide genuine information. The stock will be considered riskier and less valuable if that trust is broken. In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings.

This ratio tells you what the stock’s valuation will be in one year if the stock price doesn’t change but still lives up to the EPS estimates. The trailing PE ratio can sometimes be inaccurate or misleading if a company has one-time charges that affected its earnings in the prior 12 months. The PE ratio is commonly used to value individual stocks, or even entire markets or industries. You can also use it to compare two or more stocks or markets against one another.

However, no single ratio can tell you all you need to know about a stock. Before investing, it is wise to use a variety of financial ratios to determine whether a stock is fairly valued and whether a company’s financial health justifies its stock valuation. Forward P/E ratios can be useful for comparing current earnings with future earnings to estimate growth. The market price of the shares issued by a company tells you how much investors are currently willing to pay for ownership of the shares. For example, in February 2024, the Communications Services Select Sector Index had a P/E of 17.60, while it was 29.72 for the Technology Select Sector Index.

High P/E ratios must also be interpreted within the context of the entire industry. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. To account for the fact that a company could’ve issued potentially dilutive securities in the past, the diluted share count should be used — otherwise, the EPS figure is likely to be overstated. The PE ratio is very popular because it is easy to understand and easy to calculate.

Additionally, the Price Earnings Ratio can produce wonky results, as demonstrated below. Negative EPS resulting from a loss in earnings will produce a negative P/E. An exceedingly high P/E can be generated by a company with close to zero net income, resulting in a very low EPS in the decimals. In the next step, one input for calculating the P/E ratio is diluted EPS, which we’ll compute by dividing net income in both periods (i.e. LTM and NTM basis) by the diluted share count. The P/E ratio would be a significantly large multiple and not be comparable to industry peers (i.e. as a complete outlier) — or even come out to be a negative number.

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We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. The stock market fluctuates constantly, and so the price of a stock yesterday is not always a good indication of the price tomorrow.

Of course, a company that is persistently unprofitable, with a negative P/E ratio, is likely one you want to avoid as an investor. That means there are three approaches to calculating the P/E ratio itself. Each of those three approaches tells you different things about a stock (or index). As a point of interest, the lowest P/E ratio recorded for the S&P 500 occurred in December of 1917 when it traded for a mere 5.31 times earnings. Additionally, different industries can have wildly different P/E ratios (high tech industries and startups often have negative or 0 P/E while a retailer like Walmart may have 20 or more). One limitation of the P/E ratio is that it is difficult to use when comparing companies across industries.

Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications.

PE ratio of industries, sectors and markets

The P/E ratio of the S&P small business accountant colorado springs 500 going back to 1927 has had a low of roughly 6 in mid-1949 and been as high as 122 in mid-2009, right after the financial crisis.