PEG RatioPEG
The PEG ratio is the P/E ratio divided by the expected annual earnings growth rate in percent. A P/E of 30 with 20% expected growth gives a PEG of 1.5. It depends heavily on the growth estimate.
The PEG ratio adjusts the P/E ratio for expected earnings growth, so fast-growing and slow-growing companies can be compared more fairly. Its weak point is the growth estimate: change that and the answer changes too.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Price/earnings-to-growth ratio, PE to growth ratio
- Updated
The PEG ratio in plain words
The PEG ratio divides a stock's P/E by its expected earnings growth rate.1
Below 1 is often read as growth at a reasonable price; above 1 can mean investors are paying extra for growth.1
The usual version divides today's P/E by expected earnings growth over the next five years.2
How to calculate the PEG ratio
Get the P/E
Price divided by Earnings per Share.
Pick a growth rate
Often the five-year prospective earnings growth.2
Match the inputs
Use matching inputs throughout.1
Divide
Divide the P/E ratio by the growth rate.1
Interpret
Below 1 can mean growth at a relatively low price; above 1, a premium for growth.1
Sanity-check
Question the growth estimate — the ratio is only as good as that number.1
Worked examples
Example 1 — Fair-looking
FairHypothetical stock: P/E 24, expected growth 24%.
| PEG | 1.0 |
At about 1, the stock is neither cheap nor expensive for its growth under the usual reading.1
Example 2 — Two stocks
A cheaper for growthHypothetical A: P/E 36, growth 30%. B: P/E 18, growth 6%.
| A PEG | 1.2 |
| B PEG | 3.0 |
A has the higher P/E but looks cheaper once growth is factored in, while B's PEG above 1 suggests a premium for growth.1
Example 3 — Negative growth
Ratio failsHypothetical company: P/E 15, expected growth −5%.
| PEG | −3.0 (meaningless) |
With negative expected growth, the PEG ratio stops making sense.2
P/E vs PEG
| Aspect | P/E | PEG |
|---|---|---|
| Formula | Price ÷ EPS | P/E ÷ growth % |
| Accounts for growth | No | Yes |
| Main weakness | Ignores growth | Depends on forecasts |
| Works with losses | No | No |
Where the PEG ratio is used
Growth stock screening
Compare Price-to-Earnings Ratio across growth rates.
Sector comparison
Rank peers with different Earnings growth.
Valuation checks
Pair with Fundamental Analysis of cash flow.
Momentum names
Test whether Momentum stocks are priced for perfection.
Advantages and disadvantages
Advantages
- Adds growth to the P/E.
- Easy to calculate.
- Helps compare different growth profiles.
Disadvantages
- Depends heavily on growth estimates.
- Breaks down for negative growth.
- Misleading for cyclical and mature firms.
- Ignores debt and cash needs.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Using growth as a decimal
Use 20, not 0.20.
Mixing trailing P/E with forward growth
Keep inputs consistent.
Trusting optimistic forecasts
Growth estimates are often too high.
Using it for loss-makers
The ratio has no meaning without earnings.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- PEG = P/E ÷ expected growth %.
- Around 1 is often read as fair.
- Use consistent inputs.
- Fails with negative growth.
- Growth estimates drive the answer.
Frequently asked questions
Is a PEG below 1 always a buy?
Which growth rate should I use?
Can PEG be used for banks or utilities?
Further learning
- Price-to-Earnings Ratio
The starting ratio.
- Earnings per Share
The E in P/E.
- Earnings
Where growth comes from.
- Fundamental Analysis
Using ratios together.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Charles Schwab. What Is the PEG ratio? Basics, Formula, and Risks (opens in a new tab) Checked .
- Nasdaq. Prospective Earnings Growth (PEG Ratio) Definition (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.