PEG Ratio Calculator
Calculate the PEG ratio — Price/Earnings divided by earnings growth rate — to find stocks that may be undervalued relative to their growth.
PEG Ratio
The PEG Ratio
The PEG (Price/Earnings-to-Growth) ratio extends the classic P/E ratio by factoring in the company’s expected earnings growth rate. It was popularized by Peter Lynch in his book One Up on Wall Street.
Formula:
PEG = P/E Ratio ÷ Annual Earnings Growth Rate (%)
What the PEG ratio tells you:
| PEG Value | Interpretation |
|---|---|
| PEG < 1 | Potentially undervalued relative to growth |
| PEG = 1 | Fairly valued — price matches growth expectations |
| PEG > 1 | Potentially overvalued relative to growth |
| PEG > 2 | High premium — requires strong confidence in growth |
Two versions of PEG:
| Version | Growth Rate Used |
|---|---|
| Trailing PEG | Actual EPS growth over past 12 months |
| Forward PEG | Analyst-estimated EPS growth for next year |
Forward PEG is more widely used for growth stocks. Trailing PEG is more conservative and based on actual reported data.
Classic example:
- Stock price = $50, EPS = $2.00 → P/E = 25
- Expected annual earnings growth = 20%
- PEG = 25 ÷ 20 = 1.25 — slightly expensive relative to growth
Compare two stocks:
| Stock | P/E | Growth | PEG | Verdict |
|---|---|---|---|---|
| Stock A | 30 | 30% | 1.0 | Fair value |
| Stock B | 30 | 15% | 2.0 | Expensive |
Stock B has the same P/E but half the growth — PEG reveals the difference.
Important caveats:
- Growth estimates are often wrong — treat PEG as a starting point, not a verdict
- Works best for growth companies; not reliable for cyclicals, banks, or utilities
- Negative earnings make PEG meaningless
- Very high growth rates (50%+) can produce misleadingly low PEG values