What is PEG ratio?
PEG
In short
P/E ÷ earnings growth (% a year). Around 1 — price in line with growth; well above — expensive for its growth.
The PEG ratio links P/E to a company's earnings growth rate. Plain P/E shows only "how much am I paying", while PEG tries to answer "is that price in line with growth".
Formula
- PEG = P/E ÷ Annual EPS growth (in %, without the percent sign)
Growth is usually taken from analysts' forecast for the next 3–5 years or the average of past years.
How to read it
- PEG ≈ 1 — the price roughly matches the growth rate;
- PEG well below 1 — looks cheap relative to growth;
- PEG of 2 or more — expensive relative to growth.
These cut-offs are rules of thumb, not laws.
Limitations
PEG depends heavily on the growth forecast: if the forecast is wrong, so is PEG. Slow-growing but steady dividend payers always show a high PEG, unfairly looking "expensive". With negative earnings or near-zero growth, PEG is meaningless. It is most useful for comparing growth stocks with one another.
A has the lowest P/E but is the most expensive relative to growth (PEG). Read P/E together with growth, not alone.
Example
Three fictional companies:
- A: P/E 30, expected annual growth 25% → PEG = 30 ÷ 25 = 1.2
- B: P/E 15, growth 5% → PEG = 15 ÷ 5 = 3
- C: P/E 40, growth 40% → PEG = 40 ÷ 40 = 1.0
On P/E, B looks cheapest, but once growth is considered B is actually the most expensive. C has the highest P/E but the most reasonable PEG — provided the 40% growth actually happens.
Mistakes and tips
Check where the growth figure comes from: past results and analyst forecasts can differ a lot.
Don't rely on one metric — look at PEG together with margins, debt and free cash flow.
In cyclical companies (autos, metals) one-year growth swings wildly and distorts PEG.
Frequently asked questions
- Is a stock cheap if its PEG is below 1?
- It suggests possible value, but it is no guarantee. Often a low PEG means the market does not believe the growth forecast.
- Which is better, PEG or P/E?
- They complement each other. P/E values the price against earnings; PEG puts that ratio in the context of growth.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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