What Is the PEG Ratio?

The PEG ratio — Price/Earnings-to-Growth — refines the P/E ratio by factoring in how fast earnings are growing. It tries to answer whether a high P/E is justified by high growth.

The formula

PEG = P/E ratio ÷ annual earnings growth rate (in %). A company with a P/E of 30 and 30% earnings growth has a PEG of 1; one with a P/E of 30 but only 10% growth has a PEG of 3 — the same P/E, but far pricier relative to its growth.

What a PEG around 1 implies

A rough rule of thumb holds that a PEG near 1 suggests the price is reasonable relative to growth, below 1 may be undervalued, and well above 1 may be expensive. It's a heuristic, not a law — but it stops you from calling a high-P/E stock 'expensive' without checking whether growth justifies it.

The limitations

PEG depends entirely on the growth figure you use, which can be historical or (unreliably) forecast. It's also meaningless for companies with negative or erratic earnings. Use it alongside P/E, P/B, and the full financials.