What is PEG Ratio?
PEG stands for Price / Earnings to Growth ratio.
In simple layman’s language:
The PEG ratio helps you know if a stock is overvalued or undervalued by looking at:
🔹 The P/E ratio (Price to Earnings)
🔹 And the company’s expected growth rate
Contents
🧮 PEG Ratio Formula:
PEG Ratio = (P/E Ratio) ÷ (Earnings Growth Rate)
- P/E Ratio = Price per share ÷ Earnings per share
- Growth Rate = Expected annual earnings growth (%)
(For example: 15% growth = 15)
🏪 Simple Example (Using Numbers):
Let’s say a company:
- Has a P/E ratio of 20
- Expected to grow its profits by 10% per year
PEG = 20 ÷ 10 = 2
👉 This means you’re paying 2 times the company’s growth rate.
✅ How to Interpret PEG:
| PEG Value | What It Means | Should You Invest? |
|---|---|---|
| PEG < 1 | Stock is undervalued for its growth | ✅ Yes, potentially good value |
| PEG = 1 | Stock is fairly priced | 🤝 Neutral |
| PEG > 1 | Stock is overvalued compared to growth | ⚠️ Be cautious |
💡 Why is PEG Better Than Just P/E?
The P/E ratio tells you if a stock is expensive —
But the PEG ratio adds another layer:
👉 “Is it expensive compared to how fast it’s growing?”
For example:
- Company A: P/E = 30, Growth = 40% → PEG = 0.75 (GOOD!)
- Company B: P/E = 15, Growth = 5% → PEG = 3 (Expensive!)
Even though Company B has a lower P/E, it’s growing slower, so it’s not a better deal.
🎯 Summary:
| Term | Meaning |
|---|---|
| PEG Ratio | P/E divided by Growth Rate |
| Ideal PEG | Less than 1 is considered a good value stock |
| Use | To find fast-growing companies at reasonable prices |
