What is the PEG ratio?
The PEG ratio is the P/E divided by the growth rate — it judges whether a high P/E is justified by how fast earnings are growing.
The PEG ratio (Price/Earnings-to-Growth) improves on the plain P/E by factoring in growth. It divides a stock’s P/E ratio by its expected earnings growth rate. The idea: a high P/E can be perfectly reasonable if the company is growing fast, and cheap-looking if growth is weak.
A common rule of thumb is that a PEG around 1 suggests the price and growth are roughly in balance, below 1 may be undervalued relative to growth, and well above 1 may be expensive. So a stock on a scary-looking 40x P/E that’s growing earnings 40% a year has a PEG near 1 — arguably fair.
The big caveat is the growth input. PEG depends entirely on a forecast of future growth, which is uncertain and easy to be over-optimistic about. Use realistic, sustainable growth estimates, and treat PEG as one lens among several — not a precise verdict.
Formula
PEG = P/E ratio ÷ annual earnings growth rate (%)
Example
A stock with a P/E of 30 growing earnings at 30% a year has a PEG of 1.0 — its high P/E is backed by high growth. A P/E of 30 growing at just 10% gives a PEG of 3.0 — expensive for the growth on offer.
See it on real companies
Browse live financials and decoded filings, or just ask in plain English.
Common questions
Is a PEG below 1 always a buy?
Not necessarily. A low PEG can flag good value, but it relies on the growth forecast being accurate and sustainable. If that growth doesn’t materialise, the stock isn’t the bargain it looked.
PEG or P/E — which should I use?
Use both. P/E tells you how expensive the stock is; PEG adds whether that price is justified by growth. PEG is especially useful for fast-growing companies that look pricey on P/E alone.