PEG Ratio
The PEG ratio is the P/E ratio divided by the earnings growth rate (expressed as a percentage). It tries to answer whether a given P/E is reasonable once growth is taken into account. By convention, a PEG around 1 is considered fair and below 1 is on the cheap side.
How to read it
A company with a P/E of 30 and earnings growing 30% a year has a PEG of 1. A company with a P/E of 15 but only 5% growth has a PEG of 3, which by this yardstick makes it the more expensive of the two.
Which growth rate goes into the formula makes a big difference: actual growth over the past three years, or expected growth ahead. Find out which one is being used before reading a PEG.
Common pitfalls
- For companies with very low or negative growth, the PEG becomes enormous or meaningless.
- PEG assumes growth will continue, so it is too generous to companies riding just a year or two of explosive growth.
On FinDog
PEG appears under "Valuation" in the Decision Panel on each stock page, alongside P/E, P/B and P/S.
See it on a stock page →Related terms
- P/E RatioThe P/E ratio is the share price divided by earnings per share, which is the same as market cap divided by net income. It tells you how many years of earnings at the current level it would take to earn back the purchase price. TTM means the calculation uses trailing-twelve-month earnings.
- Forward P/EForward P/E swaps past earnings for the consensus estimate of earnings over the next twelve months. It answers the question: if the analysts' forecasts are right, is today's price expensive?