What is PEG Ratio?
The PEG ratio (price/earnings-to-growth) compares a company’s price-to-earnings (P/E) ratio with its expected earnings per share (EPS) growth rate.
It reframes a raw earnings multiple into a growth-adjusted metric, helping investors and corporate finance teams assess whether a stock’s valuation is aligned with its growth profile, capital allocation quality, and value-creation potential.
In practice, PEG links three core concepts: share price, current earnings power (EPS), expected EPS growth, and the underlying profitability drivers such as return on equity (ROE).
A PEG around 1 is often treated as “growth priced in fairly,” a PEG below 1 can indicate growth at a discount, while a PEG well above 1 suggests investors are paying a premium for anticipated growth and should scrutinize assumptions about margins, reinvestment, and competitive advantage.
Formula
Where:
- P/E Ratio = Share Price ÷ Earnings per Share (EPS)
- Annual EPS Growth Rate = forecast compound growth in EPS (expressed as a whole number, e.g., 15 for 15%)
Example
Assume a stock trades at $100 per share and generates $5 in EPS.
- P/E Ratio = 100 ÷ 5 = 20x
- Expected EPS growth rate over the next years = 15%
PEG Ratio:
Interpretation: a PEG of 1.33 signals that investors are paying a growth-adjusted premium for this equity; relative to a PEG near 1, the valuation looks rich versus its forecast EPS growth and may require strong conviction in the company’s competitive moat, cash flow durability, and reinvestment returns.