Price-to-Earnings Ratio, Earnings Yield, and the PEG Ratio Explained
October 29, 2026
The price-to-earnings (P/E) ratio is the most widely quoted valuation metric. It divides the share price by earnings per share (EPS) over a period, usually the last twelve months. A stock trading at $60 with EPS of $3 has a P/E of 20, meaning investors pay $20 for each dollar of annual earnings. The inverse, the earnings yield, is EPS divided by price: $3 ÷ $60 = 5%, which can be compared with the yield on bonds.
A P/E on its own does not tell you whether a stock is cheap or expensive. It must be compared with the company's growth rate, its industry, and interest rates.
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Trailing P/E uses the past 12 months of reported earnings and is based on facts. Forward P/E uses analysts' estimates of next year's earnings, so it is a forecast. If expected EPS rises to $3.60, the forward P/E is $60 ÷ $3.60 = 16.7. Cyclically adjusted P/E (CAPE) divides price by average inflation-adjusted earnings over 10 years to smooth the business cycle and is used for broad markets. For companies with one-time gains or losses, use adjusted earnings, but be careful about what has been excluded.
Companies with negative earnings have no meaningful P/E. High-growth firms often have high P/Es because investors pay for future earnings.
| Price | EPS | P/E | Earnings yield |
|---|---|---|---|
| $60 | $3.00 | 20.0 | 5.0% |
| $45 | $3.00 | 15.0 | 6.7% |
| $90 | $3.00 | 30.0 | 3.3% |
| $60 | $2.00 | 30.0 | 3.3% |
| $60 | $6.00 | 10.0 | 10.0% |
The PEG Ratio
The price/earnings-to-growth (PEG) ratio divides the P/E by the expected annual EPS growth rate in percent. A stock with a P/E of 20 and expected growth of 12% has a PEG of 20 ÷ 12 = 1.67. A PEG near 1 is sometimes viewed as fair value, below 1 as potentially cheap, and above 2 as expensive, though these are rough rules of thumb. The PEG helps compare a fast-growing company with a high P/E to a slow-growing company with a low P/E. A 30 P/E growing 30% (PEG 1.0) may be a better value than a 12 P/E growing 3% (PEG 4.0). Growth forecasts are uncertain, so treat PEG with caution.
What Is a Normal P/E?
The long-run average P/E of the broad US stock market has been around 15 to 17 on trailing earnings, with ranges from the single digits to over 40. Sectors differ: technology and growth companies trade at higher multiples; banks, utilities, and cyclical industries lower. The P/E tends to be higher when interest rates are low, because future earnings are discounted at lower rates. The earnings yield of 5% for a P/E of 20 can be compared with a 10-year government bond yield: if the bond yields 4.5%, stocks offer a premium of only 0.5 percentage points for taking equity risk, although earnings can grow.
Pitfalls
Earnings can be manipulated or distorted by accounting choices. A low P/E might be a value trap if earnings are about to fall. A high P/E might be justified by rapid growth, or might be a bubble. Compare firms within an industry with similar business models, and combine P/E with other measures: price to sales, price to book, free cash flow yield, debt levels, and return on equity. Never rely on a single ratio. This article is educational and not investment advice.
Frequently Asked Questions
How do I calculate the P/E ratio?
Divide the share price by earnings per share.
What is the earnings yield?
Earnings per share divided by price, the inverse of the P/E.
What does a PEG ratio tell me?
It adjusts the P/E for expected growth, with values near 1 sometimes considered fair.
Is a low P/E always good?
No. It may reflect weak prospects or temporarily high earnings.
What is forward P/E?
Price divided by estimated future earnings per share.