PEG Ratio
In short
Price/Earnings-to-Growth — P/E adjusted for expected earnings growth
If a stock has a P/E of 30 and analysts expect 30% annual earnings growth, its PEG is 1.0 — a fair multiple for that growth rate. A stock with the same P/E of 30 but only 10% expected growth has a PEG of 3.0, meaning investors are paying far more per unit of growth.
PEG divides the P/E ratio by the expected annual EPS growth rate (entered as a plain number — 20% growth is 20, not 0.20), putting fast and slow growers on a more comparable footing than P/E alone allows. Its biggest weakness sits in the denominator: growth is usually a forward-looking analyst estimate, not a reported fact, and estimates can be wrong, especially for cyclical businesses — different providers may also use different growth windows (next year versus a multi-year average), shifting the same stock's PEG meaningfully. PEG also treats growth as interchangeable regardless of durability: a company growing steadily for a decade and one growing briefly off a low base can show the same PEG. It's least useful for companies with low, negative, or highly volatile earnings growth.
Formula
PEG = P/E ÷ Annual EPS Growth Rate (%)Thresholds
- <1
- Undervalued relative to growth
- 1-2
- Fairly valued
- >2
- Overvalued even accounting for growth
Related concepts
- P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.
- Revenue Growth — If a company sold $100M last year and $120M this year, revenue grew 20%. Fast growth is exciting but check if it's profitable growth or just spending more to sell more.
- Earnings Per Share (EPS) — If a company earns $1 billion and has 100 million shares, each share 'earned' $10. Growing EPS over time is a main driver of stock price growth — but check whether it's coming from more profit or just fewer shares outstanding after buybacks, since both raise the number.