P/E Ratio, PEG Ratio, and Other Valuation Metrics Explained

Screening Concepts · July 2026

"Is this stock expensive?" is a harder question than it sounds, because price alone tells you nothing — a $10 stock isn't cheaper than a $500 one. Valuation metrics exist to make that comparison meaningful, by relating price to something else about the business.

P/E ratio (price-to-earnings)

P/E divides a company's share price by its earnings per share, producing a multiple: how many dollars investors are paying for each dollar of current annual profit. A P/E of 25 means investors are paying $25 for every $1 of earnings.

On its own, a P/E number doesn't say much — 25 might be expensive for a slow-growing utility and cheap for a fast-growing software company. P/E is most useful when compared to a company's own history, or to other companies in the same industry, rather than judged against some universal "good" number.

P/E also breaks down for companies with negative or near-zero earnings, since dividing by a very small or negative number produces a distorted or meaningless ratio.

PEG ratio (P/E adjusted for growth)

PEG takes the P/E ratio and divides it by the company's expected earnings growth rate, producing a rough answer to "is this P/E reasonable given how fast the company is growing?" A high-P/E stock with high growth can have a perfectly reasonable PEG, while a low-P/E stock with no growth might have a worse one.

A PEG around 1 is a commonly cited rough benchmark for "growth and valuation roughly in balance," though this varies by sector and depends heavily on how reliable the growth estimate actually is — growth forecasts are estimates, not guarantees.

Price-to-book and price-to-sales

Price-to-book compares share price to the company's net asset value per share — more relevant for asset-heavy businesses like banks and industrials than for asset-light software companies. Price-to-sales compares price to revenue per share, which is useful specifically when earnings are negative or unstable, since revenue is harder to manipulate and rarely goes negative.

Screening by valuation

Each of these can be combined into a single natural-language request:

• "Stocks with a P/E under 20 and positive earnings growth"
• "Stocks with a PEG ratio under 1"
• "Large-cap tech companies with price-to-sales under 5"

Valuation metrics work best combined with other context — a low P/E can mean a genuine bargain or a business with real, ongoing problems, and the metric alone doesn't tell you which.

This article is for educational purposes only and is not financial, investment, or trading advice. Nothing here is a recommendation to buy, sell, or hold any security. Always do your own research and consult a licensed financial advisor before making investment decisions.