P/E and Earnings Yield Calculator

What the P/E ratio actually tells you

The price to earnings ratio is the price of one share divided by the earnings attributable to one share. Read it as a number of years: a P/E of 20 means you are paying twenty dollars for every dollar of annual profit, so at today's earnings level it would take twenty years of profit to repay the purchase price. That framing makes the ratio less mysterious than the label suggests, and it explains why fast growing companies carry high ones. The price reflects the larger dollar of profit expected in a few years rather than the one reported last quarter.

The worked example behind the defaults

The calculator loads with a $185.00 share price, trailing EPS of $9.25, forward EPS of $10.60, expected growth of 12% and a ten year Treasury at 4.20%.

Trailing P/E = 185.00 / 9.25 = 20.00

Forward P/E = 185.00 / 10.60 = 17.45

PEG = 20.00 / 12 = 1.67

Earnings yield = 9.25 / 185.00 = 5.00%

The stock trades at twenty times what it earned and seventeen and a half times what it is expected to earn. The gap between those two numbers is the growth the market has already agreed to pay for. Earnings yield of 5.00% against a 4.20% Treasury leaves a spread of 0.80 percentage points, which is thin compensation for taking on the risk of a single company's profit statement. Set the target multiple to 18 and the implied price is 18 x $9.25 = $166.50, about 10.0% below where it trades.

Trailing, forward and the gap between them

Trailing earnings are audited history. Forward earnings are a consensus of analyst models that gets revised every quarter, usually downward as the period approaches. A forward P/E that sits far below the trailing one is telling you that the market expects a large jump in profit, and the multiple only looks cheap if that jump arrives. Reading the guidance section of the last report is the quickest check on whether it is plausible, which how to read an earnings report walks through line by line.

PEG and its limits

PEG divides the multiple by the growth rate to put fast and slow companies on one scale. The convention treats a PEG near 1.0 as a multiple in line with growth. The weakness is that the growth input is a forecast, and the ratio is very sensitive to it. Move expected growth from 12% to 9% and the PEG on the example above jumps from 1.67 to 2.22 without the price changing at all. PEG also ignores the quality of earnings and the balance sheet, so a company growing on borrowed money scores the same as one funding itself. Stock valuation basics sets it beside price to sales, price to book and EV/EBITDA.

Using the Treasury comparison

Subtracting the ten year Treasury yield from the earnings yield gives a rough measure of what equities pay you for the extra risk. It is a proxy rather than a precise equity risk premium, because it ignores growth in future earnings and assumes the current profit level holds. When that spread compresses toward zero, the market is either confident about growth or indifferent to risk, and both states have historically been fragile. How interest rates affect stocks covers the mechanism, and the Treasury securities guide explains where to find the current yield.

A multiple is a shortcut for a cash flow model, so when the shortcut looks strange, build the model. The DCF calculator discounts projected free cash flow to a per share value, the CAGR calculator tells you what a holding has actually returned, and how to analyze a stock puts the ratios into a repeatable checklist. If you are weighing a cheap multiple against a fast grower, growth versus value explains why leadership between the two rotates.