Is the company worth the price? Plug in the numbers.
PE Ratio20x
1x300x
Earnings Growth10%
0%50%
Risk-Free Rate
or custom:%
↓
Cheap
⚠️
Extreme PE warning. At 40x earnings, even strong growth may be offset by PE compression. Historically, very high PEs tend to shrink toward the ~25x average over time — this drag is factored into the math below.
Cheap — but is it real? Verify before you commit.
✓
Is the growth rate sustainable?
Are these peak margins from a temporary cycle (commodities, one-time demand) — or structural?
✓
Are the earnings clean?
Check for one-offs: asset sales, tax benefits, litigation windfalls, or any non-recurring income inflating the number.
✓
Is this company actually growing?
A stagnant business with low PE isn't cheap — it's a value trap. Has revenue and profit actually grown over the last 3–5 years?
✓
Is this industry expanding or shrinking?
A cheap stock in a dying industry may stay cheap forever. Will demand for what this company sells still be growing in 5 years?
Educational tool only. Not financial advice.
Equity risk premium assumed at 5%.
Frequently Asked Questions
What is a PE ratio?
The PE (Price-to-Earnings) ratio is the price you pay for every $1 of a company's annual earnings. A PE of 20 means you pay $20 for $1 of earnings. It tells you how much the market is willing to pay based on current profitability.
Why does the risk-free rate matter?
The risk-free rate is your alternative — what you'd earn in a government bond with zero risk. A stock must deliver more than this rate plus an equity risk premium to justify the risk. A 15 PE stock might be cheap when bonds pay 2%, but expensive when they pay 7%.
How is this different from the PEG ratio?
The PEG ratio (PE ÷ Growth) is a useful shortcut, but it ignores what else you could do with your money. This tool adds the risk-free rate as a third input, so the verdict adjusts based on the opportunity cost in your country.
Go Deeper with Real Data
Export 10 years of income statements, balance sheets, and cash flow for any US public company into Excel.