What Is the PEG Ratio?

The Price/Earnings to Growth ratio, commonly abbreviated as PEG, expands upon the ubiquitous price-to-earnings metric by incorporating a company’s expected growth rate. While the traditional P/E ratio compares the market price of a stock to its earnings per share, it overlooks how quickly those earnings are projected to expand. The PEG ratio attempts to remedy this oversight by dividing P/E by the anticipated annual earnings growth percentage. Doing so contextualizes valuation through the lens of future prospects. A high P/E may be justified if profits are poised to rise rapidly, whereas a seemingly modest P/E can still signal overvaluation if growth is stagnating. By balancing price, current profitability, and future expectations, PEG provides a more nuanced snapshot for investors deciding whether a stock is richly valued or attractively priced. Because the calculation uses easily accessible inputs, it has become a staple in equity research and personal investing.

The PEG Formula

The calculator employs the following relationship:

Here, $P$ denotes the share price, $E$ represents earnings per share, and $g$ is the expected annual growth rate expressed as a whole number rather than a decimal. The inner fraction $\frac{P}{E}$ calculates the familiar P/E ratio. The result is then divided by growth to arrive at PEG. When you click the button above, the script converts growth from percentage to whole number, computes P/E, divides by growth, and displays both the P/E and PEG ratios. If the growth rate is zero or negative, the calculator alerts you because PEG would be undefined or misleading under those conditions.

The table below summarizes each input:

Input	Description
Share Price	Current market price per share of the stock.
Earnings Per Share	Trailing twelve-month earnings attributable to each share.
Expected Growth Rate	Analyst or management estimate of annualized EPS growth expressed as a percentage.

Interpreting PEG Values

Like any valuation metric, PEG ratios require context. The following table offers a rough guideline:

PEG Ratio	Interpretation
< 1	Potentially undervalued relative to growth expectations.
≈ 1	Fairly valued; price aligns with projected growth.
> 1	Possibly overvalued unless growth forecasts are conservative.

These thresholds are not absolutes. A rapidly expanding company in a disruptive industry may command a PEG above one for extended periods if investors believe growth will accelerate. Conversely, cyclical firms might trade below one during boom periods when earnings temporarily surge. Always compare PEG within industry peers and consider the quality of growth estimates.

Example Calculation

Suppose a technology firm trades at $50 per share and reported earnings per share of $2 over the past year. The stock’s P/E ratio is therefore 25. Analysts forecast EPS will grow at 20% annually for the next five years. Dividing 25 by 20 yields a PEG ratio of 1.25. This suggests the stock may be priced a bit ahead of its growth, though the conclusion depends on one’s confidence in the forecast. If growth instead materializes at 30%, the PEG drops to 0.83, hinting at attractive value. By experimenting with different scenarios in the calculator, investors can gauge how sensitive valuation is to changes in expected performance.

PEG vs. P/E

The PEG ratio is not a replacement for the P/E ratio but a complement. P/E reflects what investors are willing to pay for each dollar of current earnings. PEG layers on the growth dimension. A company with a P/E of 10 and zero growth could be more expensive than a firm with a P/E of 30 and rapid expansion. However, PEG inherits the weaknesses of its components. If earnings are temporarily depressed due to one-time charges, P/E and therefore PEG may appear artificially high. Similarly, aggressive growth forecasts can push PEG below one even if the assumptions are unrealistic. Understanding the drivers behind the numbers remains essential.

Limitations and Caveats

Despite its utility, PEG has limitations. Growth rates are notoriously difficult to predict, and small changes can dramatically alter the ratio. Using trailing growth instead of future estimates may give a more conservative view but could lag changing business conditions. Additionally, PEG assumes a linear relationship between growth and valuation, which may not hold for companies in early-stage development or mature businesses undergoing transformation. The ratio also ignores factors such as capital structure, cash flow quality, and return on invested capital. For a fuller picture, investors should combine PEG analysis with other metrics like free cash flow yield, profit margins, and balance sheet strength.

Using PEG in Practice

Investors often screen for stocks with low PEG ratios to identify potential bargains. However, a low PEG should be the start of due diligence, not the conclusion. Examine whether growth projections stem from reliable sources and whether the company has a history of meeting or beating estimates. Consider competitive advantages, market saturation, and economic cycles that could affect future earnings. PEG can also help compare growth companies across sectors. For instance, a retail chain and a software firm may have wildly different P/E ratios, but PEG normalizes valuations by expected growth, enabling apples-to-apples assessments.

Conclusion

The PEG ratio calculator above delivers a quick, client-side method to contextualize a stock’s price relative to both current earnings and projected growth. By entering share price, earnings per share, and an anticipated growth rate, users receive instant P/E and PEG figures without sending data to external servers. The extended explanation outlines the formula, component definitions, interpretation guidelines, and limitations, equipping analysts, students, and personal investors with a deeper appreciation of how growth expectations shape valuation. Use PEG alongside other financial metrics to build a balanced view of potential investments and to avoid paying too much for growth that may never materialize.