~1 min read
P/E Ratio Formula
P/E = Stock Price / EPS
Trailing vs Forward P/E
- Trailing P/E: Uses last 12 months of actual earnings. More reliable but backward-looking.
- Forward P/E: Uses next 12 months analyst estimates. More relevant for growing companies — shows what the market is pricing in for the future.
If Forward P/E < Trailing P/E, the market expects earnings to grow. If Forward P/E > Trailing P/E, earnings are expected to shrink.
Earnings Yield
Earnings Yield = 1 / P/E × 100
Earnings yield is the inverse of P/E — it converts valuation into a return metric comparable to bond yields. A P/E of 20× = 5% earnings yield. Compare to 10-year Treasury yield to gauge relative attractiveness.
PEG Ratio (P/E to Growth)
PEG = P/E / Expected EPS Growth Rate (%)
Peter Lynch popularized PEG as a growth-adjusted valuation metric. PEG = 1 means the P/E equals the growth rate — "fairly valued." PEG < 1 suggests potential undervaluation; PEG > 2 suggests the stock is pricing in very high growth expectations.
S&P 500 Historical P/E Context
- Long-run average: ~15–17×
- Post-2010 average (low-rate era): ~20–25×
- During recessions: often drops to 10–12×
- Bubble peaks: 30–40×+