Chapter 3 of 6
P/E, PEG and earnings yield: cheap compared with what?
Use earnings-based multiples with consistent earnings, growth quality and financial risk.
In this chapter
P/E compresses many assumptions into one number #
Price/earnings divides share price by matching per-share earnings, or equity value by corresponding owners’ profit. Trailing and forward earnings use different periods and information.
Negative or near-zero earnings can make P/E unhelpful. A low multiple on peak-cycle profit may hide expensive normalised earnings. A high multiple can reflect optimism that still fails if growth disappoints.
Read earnings quality before comparing peers #
Normalise one-offs, ownership attribution and share count. Compare similar business mix, growth, reinvestment and leverage. Identical P/E does not imply identical risk or value.
A cash-rich company and a debt-heavy one can require enterprise-value analysis as well. Do not take the peer median and multiply by your preferred profit forecast without explaining why the peer economics apply.
PEG and earnings yield are aids, not answers #
PEG divides a stated P/E by a growth measure using a declared percentage convention. Results depend heavily on growth horizon and sustainability. It ignores many differences in risk, payout and capital intensity.
Earnings yield is the reciprocal of a meaningful positive P/E. It is accounting earnings relative to price, not a guaranteed cash distribution or bond coupon. Comparing it with a bond yield requires consideration of risk and earnings uncertainty.
Use reverse valuation to expose the assumption #
Ask what growth and profit persistence the current price requires under a selected framework. Then compare that demand with capacity, competitive position and reinvestment.
A multiple can rerate for reasons beyond current earnings. Show a scenario in which earnings rise but the multiple falls. Better business performance and a positive share return are not the same proposition.
Hypothetical worked example
A fictional earnings and multiple change
A share at ₹200 with EPS ₹10 trades at 20 times earnings and has 5% earnings yield. If EPS rises to ₹12 but the multiple falls to 15, the implied scenario price is ₹180.
Profit per share grew 20%, yet the scenario price fell 10%. The calculation is conditional, not a forecast for a named security.
Common mistakes
- Calling earnings yield a guaranteed cash coupon.
- Using peak earnings as normalised earnings.
- Comparing trailing and forward P/E without labels.
Can EPS grow while the share-price scenario falls?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Desk assignment
What to submit
Compare three fictional peers with explicit earnings periods, normalisations, growth assumptions and a multiple-compression case.
Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.
Sources and further reading
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- NSE: company integrated financial filings ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.