Lesson 4 of 10 · All lessons in this module
- Price multiples and the method of comparablesVideo lesson
- The relative valuation process
- Justified multiples: forecasted fundamentals, PEG and regression
- P/E in depth: earnings yield, PVGO and normalized earnings
- Sales, dividend, cash flow and industry-specific multiples
- Enterprise value multiples, asset-based valuation and choosing a modelVideo lesson
- EV/EBITDA drivers and value-to-book multiples
- Choosing a peer group: industry and factor approaches
- Current, past and forward multiples, and terminal values
- Integrated cases: why multiples differ, the justified P/E and comparables
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 4 of 10 · 14 min
P/E in depth: earnings yield, PVGO and normalized earnings
The P/E tells you how much of a price is a bet on future growth; its justified value rises with growth and falls with risk, and it is only useful when the earnings in the denominator are positive, recurring and adjusted for the business cycle.
In short
- Earnings yield = E/P. A no-growth firm is worth ; any price above that is the present value of growth opportunities (PVGO).
- . Negative PVGO suggests reinvestment destroys value.
- Justified trailing P/E = payout × (1 + g) / ( − g): up with g, down with .
- Use core earnings: strip out non-recurring items. P/E is not meaningful when EPS is zero, negative or tiny.
- For cyclicals use normalized EPS: the average EPS over a full cycle, or average ROE × current book value per share (better when the company's size has changed). Consider diluted EPS.
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