Valuation Ratios: P/E, PEG, Price-to-Book, and EV/EBITDA

Every valuation ratio is the same sentence with different nouns: price, divided by something the business produces. None of them tells you whether a stock is cheap — they tell you what the market is currently assuming, which is a far more useful thing to know.

Last verified 2026-07-28

P/E is an expectation, not a verdict

Price-to-earnings is the share price divided by earnings per share. A P/E of 20 says the market is paying $20 for each $1 of current annual earnings — or, read the other way, that it would take 20 years of today's earnings to repay the price.

The instinct is to call a low P/E cheap. That instinct is wrong often enough to be dangerous, because the ratio's denominator is today's earnings and the price reflects tomorrow's. A P/E of 6 usually means the market expects earnings to fall, not that it has overlooked a bargain.

So the ratio isn't a valuation — it's a summary of what's being assumed. The work is deciding whether the assumption is right, and that requires comparison: against the company's competitors, against its own history, and against the growth rate the price implies.

PEG, and how much weight it can carry

PEG divides the P/E by the expected earnings growth rate, addressing the obvious objection to P/E: a fast-growing company should be worth more per dollar of current earnings, because current earnings understate it.

A P/E of 30 growing at 30% gives a PEG of 1.0; a P/E of 15 growing at 5% gives 3.0. On this measure the expensive-looking company is the cheaper one, which is a genuinely useful correction to the raw ratio.

Hold the rule loosely, though. PEG comes from Peter Lynch's writing rather than any regulator or research finding. It breaks entirely for low-growth and shrinking companies — a negative growth rate makes it meaningless. And it is only as good as the growth estimate you feed it, which is usually an analyst forecast, not a fact.

Enterprise value counts what you'd actually take on

Market cap prices the equity. Enterprise value prices the whole business: market cap plus total debt minus cash. Debt is added because an acquirer inherits it; cash is subtracted because an acquirer keeps it and can use it to offset the purchase.

That's why EV/EBITDA can rank two companies differently from P/E. P/E sees only the equity slice and is distorted by how a company is financed — a heavily indebted firm can show a flattering P/E while being expensive to actually own.

EBITDA — earnings before interest, taxes, depreciation and amortisation — pairs with EV because it's also pre-financing, so both sides of the ratio ignore capital structure. Its weakness is that it ignores real costs: depreciation stands in for equipment that genuinely wears out and must be replaced, so EBITDA flatters capital-intensive businesses most.