P/E vs PEG vs EV/EBITDA

P/E: the equity-holder multiple

Price-to-earnings is market price per share divided by trailing or forward earnings per share. It is intuitive for profitable businesses where earnings are reasonably representative of recurring economics.

P/E becomes less informative when earnings are negative, highly cyclical, distorted by one-off items, or affected by unusual leverage. Always identify whether you are using trailing reported earnings or an estimate.

PEG: P/E plus an explicit growth assumption

A common PEG construction is P/E divided by an annual earnings-growth rate. For example, a P/E of 24 and a 12% growth assumption gives a PEG of 2.0 when the growth rate is entered as 12 rather than 0.12.

PEG looks precise but inherits every weakness of its inputs. Growth may be historical, forecast, cyclical or only one year long. Changing the growth period can change the ratio materially.

EV/EBITDA: useful when capital structure matters

Enterprise value starts from equity value and incorporates debt and cash. EV/EBITDA is therefore often more comparable across companies with different leverage, because the numerator is based on the whole operating enterprise rather than only common equity. The ratio itself should be treated as N/M when EBITDA is zero/negative or enterprise value is negative.

EBITDA is not free cash flow. It ignores interest, taxes, depreciation and amortisation, and it can look healthy in businesses that require heavy recurring capital expenditure. A negative or zero EBITDA denominator makes EV/EBITDA non-meaningful rather than cheap.

A reproducible three-multiple worksheet

For the target company and three to five close peers, record the same-period revenue, EBITDA, earnings, net debt and market capitalisation. Calculate P/E, PEG and EV/EBITDA using the same definition and reporting period for every company.

Then add two quality columns: free-cash-flow conversion and return on capital. A multiple comparison without denominator quality can make two businesses look similar when their economics are not.

Worked example with hypothetical numbers

Company A has a P/E of 24, expected earnings growth of 12%, and EV/EBITDA of 15. Company B has a P/E of 18, expected growth of 6%, and EV/EBITDA of 11. The ratios alone do not establish which business is cheaper because debt, margins, reinvestment needs and the reliability of the growth assumptions differ.

The research question is why the market assigns each multiple. A premium can reflect higher returns on capital, stronger reinvestment opportunities, better cash conversion or lower balance-sheet risk; it can also reflect expectations that later fail.

Which multiple fits which business?

Use P/E as a natural starting point for mature profitable businesses where financing structure is not the dominant distortion. Use EV/EBITDA when comparing businesses with materially different leverage or where enterprise value is a better expression of operating assets.

Use PEG only when the growth input is explicit, defensible and comparable across the peer set. For banks and other financial firms, enterprise-value conventions require extra care because debt is part of the operating funding model.

Frequently asked questions

Is a lower P/E always better than a higher P/E?

No. The multiple is a price relative to earnings, so you also need to assess growth, durability, leverage, capital intensity and the quality of the earnings denominator.

What does a PEG of 1 mean?

Under the common convention, a PEG of 1 means the P/E equals the stated annual earnings-growth rate. It is only as useful as the growth definition behind it.

Why can EV/EBITDA and P/E tell different stories?

Debt, cash, interest expense, taxes and depreciation can create large differences between enterprise value and equity value. The two multiples therefore answer different questions.