PEG Ratio
Relates the P/E ratio to the expected earnings growth rate.
Formula
PEG Ratio = P/E Ratio / EPS Growth Rate (%)
Worked exampleA P/E of 20 divided by expected EPS growth of 10% gives a PEG ratio of 2.0.
Calculation steps
- Start with a P/E ratio of 20.
- Use an EPS growth estimate of 10, representing 10%.
- Divide 20 by 10 to get 2.0.
How to interpret it
A lower PEG may indicate a more attractive price relative to growth, but growth quality and forecast reliability still matter.
Industry context
PEG is most useful among profitable growth companies with comparable growth assumptions. It is weaker for mature, cyclical, or loss-making firms.
Common mistakes
- Do not enter 0.10 when the convention expects 10.
- Avoid PEG when growth is negative or close to zero.
- Confirm whether growth is historical or forecast.