Model Trailing and Forward P/E multiples, Peter Lynch PEG ratios, earnings yield, and implied fair value stock prices under varied earnings growth rates.
Modeling per-share earnings growth, cumulative dividends, and implied future share prices.
| Forecast Year | Projected EPS | Cumulative Dividends | Implied Price (Current P/E) | Implied Price (Peer P/E) | Total Stockholder Value | Annualized Return (CAGR) |
|---|
Resulting Forward P/E multiple across share price and earnings variations.
Resulting Peter Lynch PEG ratio across valuation multiples and growth rates.
The Price-to-Earnings (P/E) Ratio is the cornerstone equity valuation multiple in corporate finance, wealth management, and securities analysis. It reflects the market price an investor pays today for one dollar of annual company profit. However, judging a company purely on its P/E multiple can be deceptive: a 30x P/E ratio for a company doubling its net income annually is far more attractive than an 11x P/E ratio for a declining business.
P/E Multiple = Current Stock Price / Earnings Per Share (EPS)
Trailing P/E uses the prior 12 months (TTM), whereas Forward P/E utilizes next 12-month consensus expectations (NTM).
PEG Ratio = (P/E Multiple) / (Annual EPS Growth Rate %)
A PEG below 1.0 suggests an undervalued Growth at a Reasonable Price (GARP) candidate, while a PEG exceeding 2.0 indicates full or stretched valuation.
Earnings Yield = (EPS / Stock Price) * 100% = 1 / P/E
Subtracting the 10-year Treasury bond yield from the earnings yield derives the Equity Risk Premium (ERP), signaling relative equity attractiveness.
Adjusted PEG = (P/E Multiple) / (Growth Rate % + Dividend Yield %)
Peter Lynch's modified formula credits dividend-paying companies for cash distributions returned to shareholders.
The Price-to-Earnings (P/E) ratio measures a company's current share price relative to its per-share earnings: P/E = Stock Price / Earnings Per Share (EPS). It indicates how many dollars investors are willing to pay for each dollar of annual company earnings. A higher P/E reflects strong future growth expectations, whereas a lower P/E indicates mature, slow-growth businesses or undervalued opportunities.
Popularized by legendary investor Peter Lynch, the PEG ratio (Price/Earnings-to-Growth) normalizes the P/E multiple by the company's expected annual earnings growth rate: PEG = (P/E Multiple) / (Annual EPS Growth Rate %). A company trading at 30x P/E growing earnings at 30% has a PEG of 1.0, representing fair value. A basic P/E penalizes high-growth companies, whereas the PEG ratio provides a balanced Growth-at-a-Reasonable-Price (GARP) comparison.
In fundamental equity analysis: a PEG ratio under 1.0 signifies that a stock is potentially undervalued relative to its earnings growth prospects; a PEG ratio of exactly 1.0 represents fair market equilibrium; and a PEG ratio above 1.5 to 2.0 indicates an expensive stock or an overvalued premium where expectations may be stretched.
Earnings Yield is the mathematical reciprocal of the P/E ratio: Earnings Yield = (EPS / Stock Price) * 100% = 1 / P/E. It represents the annual percentage return generated by the company's earnings per dollar invested. Institutional asset allocators compare a stock's earnings yield against benchmark 10-year Treasury bond yields to determine whether equities offer an attractive equity risk premium (ERP).
Trailing P/E (P/E TTM) calculates valuation based on actual audited earnings reported over the prior 12 months. Forward P/E (P/E NTM) divides the current price by consensus Wall Street analyst projected earnings for the next 12 months. For rapidly expanding companies, Forward P/E is typically lower than Trailing P/E due to anticipated earnings growth.