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What is PEG Ratio?

Quick Answer

The PEG Ratio, or Price/Earnings to Growth Ratio, is a valuation metric for assessing a stock's price relative to its earnings growth rate.

πŸ€– LARRY'S TAKE

" The PEG Ratio improves on P/E by factoring in growth β€” a stock with a P/E of 30 looks expensive until you see 30% annual earnings growth. PEG below 1 is classically 'undervalued,' above 2 means you're paying for hype. The catch: growth forecasts are guesses. You're dividing one uncertain number by another uncertain number and calling it analysis. "

BORING DEFINITION

The PEG Ratio, or Price/Earnings to Growth Ratio, is a valuation metric for assessing a stock's price relative to its earnings growth rate. It is calculated by dividing the P/E ratio by the annual earnings growth rate. A lower PEG indicates that a stock may be undervalued given its growth potential.

How Does PEG Ratio Work?

To compute the PEG Ratio, divide the Price/Earnings ratio by the expected earnings growth rate. This calculation adjusts the P/E ratio by considering growth, offering a more comprehensive view of a company's valuation. A PEG below 1 is often seen as attractive, indicating undervaluation.

Why it matters: Understanding the PEG Ratio helps investors identify stocks that may offer growth at a reasonable price, balancing both current earnings and future potential.

REAL WORLD EXAMPLE

> An investor examines Company X with a P/E ratio of 15 and an annual earnings growth rate of 10%. The PEG Ratio is calculated as 1.5, suggesting the stock is priced fairly for its growth.

Frequently Asked Questions About PEG Ratio

What is a good PEG ratio? +
A PEG ratio below 1.0 is traditionally considered undervalued β€” you're paying less per unit of growth than the market average. Between 1–2 is fair value. Above 2 suggests you're overpaying relative to expected growth. These are rough rules of thumb, not gospel β€” growth estimates are notoriously unreliable, especially for high-growth tech stocks.
How is the PEG ratio calculated? +
PEG = P/E ratio Γ· annual earnings growth rate. For example, a stock with a P/E of 20 and expected earnings growth of 15% has a PEG of 1.33. The growth rate used can be historical (trailing) or projected (forward) β€” forward PEG is more common but also more speculative.
What is the difference between P/E and PEG ratio? +
P/E compares price to current earnings. PEG adds a growth dimension β€” it tells you whether you're paying a fair price given how fast earnings are expected to grow. P/E can make fast-growing companies look expensive; PEG often justifies their premium. Neither metric works in isolation.
What are the limitations of the PEG ratio? +
PEG relies on earnings growth forecasts, which analysts routinely get wrong. It also doesn't account for debt, dividends, or industry differences. A PEG of 0.5 for a company drowning in debt is not actually a bargain. Use PEG as one data point among many, not as a standalone buy signal.
Can PEG ratio be negative? +
Yes, if earnings are negative or declining, the PEG ratio becomes negative or meaningless. A negative PEG doesn't signal a buying opportunity β€” it signals the formula breaks down. For unprofitable companies, other metrics like price-to-sales or EV/EBITDA are more useful.
Who invented the PEG ratio? +
The PEG ratio is widely attributed to Peter Lynch, the legendary Fidelity fund manager who ran Magellan Fund from 1977–1990. Lynch used it as a quick sanity check: if PEG is below 1, the stock might be worth a closer look. He'd be horrified by how many people now use it as their only metric.

πŸ“Š Today's Candidates for PEG Ratio

HOOD
+5.15%
COIN
+5.06%
MSTR
+5.02%

Click a symbol for live data. Financial advice? No way.

πŸ“š FROM THE ACADEMY

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