What is PEG Ratio?
The PEG ratio adjusts the P/E ratio for the company's expected earnings growth rate, giving a more complete picture of valuation. A PEG of 1.0 is often considered fair value: you are paying one unit of P/E per unit of growth. Below 1.0 suggests undervaluation relative to growth; above 1.0 may indicate overvaluation. Peter Lynch popularised this metric as a quick screen for growth-at-a-reasonable-price (GARP) investing. The denominator is typically the next 12-month consensus EPS growth rate, though some analysts use 3-5 year projected growth. PEG is not meaningful for companies with negative earnings or negative growth rates.
Formula
PEG Ratio = P/E Ratio / Earnings Growth Rate (%)
P/E = Price / EPS
Growth Rate = expected annual EPS growth (%)
Calculator
How to Use
- 1Calculate P/E: Divide current price by trailing or forward EPS.
- 2Find the growth rate: Use consensus analyst EPS growth forecast for next 12 months or 3-5 years.
- 3Divide: P/E ÷ Growth Rate (%). A PEG < 1 is generally considered favourable.
- 4Compare: Most useful within a sector. High-growth sectors naturally carry higher PEG ratios than slow-growth sectors.
Worked Example
Example: Tech company
P/E
25×
EPS Growth
20%
PEG = 25 / 20 = 1.25. The stock is slightly expensive relative to its growth rate. A competitor with a P/E of 20 and the same 20% growth rate has a PEG of 1.0, which is potentially better value. PEG below 0.8 would be a strong value signal for a growth stock.