P/E, PEG & Valuation Ratios
What you pay per dollar of earnings — and why the number only means something against growth and peers.
The StatementsBeginner 6 min read· Lesson 3 of 4 in Company Fundamentals
P/E
P/E = price ÷ EPS: years of current earnings you're paying for. Meaningful only in context — vs the company's own history, vs sector peers, vs growth. Utilities at 12 and software at 30 can be identically 'fairly valued.' A P/E of 8 screams either bargain or terminal decline; the ratio can't tell you which — the statements can.
PEG
PEG = P/E ÷ expected growth rate crudely normalizes price against growth (≈1 as the classic fair-value anchor). Its weakness is the G — a forecast. Treat PEG as a sorting device, not a verdict.
The trap
Cheap-on-ratios + deteriorating business = value trap (the ratio is cheap because the E is about to fall). Expensive + durable compounding = often the better buy. Ratios start the conversation; they never finish it.