P/E and PEG ratios

the quick “how expensive?” checks · Valuation — what a company is actually worth

Share price ÷ annual earnings per share — how many dollars you pay for each dollar of yearly profit. A P/E of 25 means ~25 years of today’s earnings to “earn back” the price if nothing grew. Higher = pricier, or more growth expected.

P/E ÷ the growth rate — it puts the P/E in context. A P/E of 40 sounds expensive, but if earnings grow 40% a year the PEG is 1.0, arguably fair. It’s a fast “is the price justified by the growth?” test.

P/E = share price ÷ earnings per share (EPS)
PEG = P/E ÷ annual earnings growth rate (in %)

EPS

— earnings per share — the company’s yearly profit divided by its shares

growth rate

— the % the earnings are expected to grow per year

• The Balance — what is a P/E ratio ↗
• The Balance — the PEG ratio ↗