PEG ratio

P/E divided by earnings growth, so growth is taken into account

In detail

The PEG ratio is the P/E ratio divided by the annual growth rate of earnings per share, in percent. On its own, P/E makes fast-growing companies look expensive; dividing by the growth rate makes them easier to compare. A value of 1 is often mentioned as a reference point, but the growth rate is a forecast, so the result shifts sharply if the forecast misses. It does not work for companies with negative or near-zero growth.

Example

A P/E of 30 with earnings growing 20% a year gives a PEG of 1.5; a P/E of 15 growing 5% gives 3.

Related terms

P/E ratio EPS Growth and value stocks Consensus estimate

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