PEG Ratio Calculator

Magdy Hassan

April 22, 2025

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PEG Ratio Calculator

Calculate the PEG Ratio for better stock evaluation.

Price per Share ($):

Earnings per Share (EPS) ($):

Growth Rate (%):

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Understanding PEG Ratio

The Price/Earnings to Growth (PEG) ratio is a critical financial metric used to evaluate a company's valuation while considering its earnings growth potential. Unlike the simple price-to-earnings (P/E) ratio, the PEG ratio offers a more nuanced view by incorporating predicted earnings growth rates, making it a valuable tool in investment analysis and stock selection.

The PEG ratio assists investors in determining whether a stock is overvalued, undervalued, or fairly priced based on its growth expectations. Hence, it simplifies the comparison between companies with different growth rates by factoring in the growth aspect in conjunction with earnings. Understanding and calculating the PEG ratio is essential for informed investment strategies.

The PEG Ratio Formula

The PEG ratio is calculated using the following formula:

$$ \text{PEG Ratio} = \frac{\text{P/E Ratio}}{\text{Annual EPS Growth Rate}} $$ Where:

P/E Ratio: The price per share divided by the earnings per share (EPS).
Annual EPS Growth Rate: The expected growth rate of earnings per share, typically over the next 3-5 years, expressed as a percentage.

A PEG ratio of 1 suggests that the stock's price is accurately valued relative to its growth prospects, while a ratio below 1 can indicate undervaluation and above 1 may suggest overvaluation.

Why Calculate PEG Ratio?

Investment Decision-Making: Potentially guides investments by identifying stocks that may provide more value based on growth expectations.
Comparative Analysis: Enables comparison of growth stocks across industries, facilitating diversification and informed portfolio adjustments.
Market Sentiment Insight: Assists in discerning overall market sentiment about a company's growth potential, thus guiding investment timing.
Valuation Context: Provides a context for evaluating price movement and price adjustments based on growth expectations and earnings revisions.

Applicability Notes

The PEG ratio is particularly effective in assessing growth stocks across varying industries. Investors can use it to identify opportunities for potential capital appreciation. However, caution should be exercised, as the PEG ratio relies heavily on future growth estimations, which can be subject to change due to market conditions, economic influences, or internal company changes.

Frequently Asked Questions (FAQs)

What does the PEG ratio represent?: The PEG ratio compares the P/E ratio of a stock to its expected earnings growth rate, providing a more comprehensive valuation metric than P/E alone.
How is the PEG ratio calculated?: PEG ratio is calculated by dividing the P/E ratio by the expected annual earnings per share (EPS) growth rate.
What is a good PEG ratio?: A PEG ratio around 1 is considered ideal, suggesting that the stock's price reflects its earnings growth. Ratios below 1 may indicate undervaluation.
Can the PEG ratio be used for all companies?: While the PEG ratio is particularly useful for growth stocks, it may not provide meaningful insights for companies with inconsistent growth or negative earnings.
How often should I check the PEG ratio?: The PEG ratio can be analyzed quarterly or annually to adapt investment strategies based on new financial data and growth estimates.
Are there limitations to the PEG ratio?: Relying solely on the PEG ratio can be misleading since it depends on accurate earnings growth projections, which can fluctuate widely.
What industries typically use the PEG ratio?: Growth-oriented industries such as technology, pharmaceuticals, and consumer goods often use the PEG ratio to assess stock value.
Is a higher PEG ratio always bad?: A higher PEG ratio might indicate overvaluation, but it can also reflect strong growth fundamentals; context and analysis of growth prospects matter.
How does the PEG ratio help in stock analysis?: This ratio helps investors identify stocks that align with their investment strategy by balancing price and growth potential to optimize returns.
What is the difference between P/E and PEG ratios?: P/E ratio looks solely at earnings relative to price, whereas PEG also factors in growth expectations, providing a richer valuation insight.

Example Calculations

Example 1: Evaluating a Growth Stock

A technology company has a current stock price of $90 and an earnings per share (EPS) of $3. Its analysts predict a growth rate of 15% for the next five years.

Calculating P/E Ratio: $90 / $3 = 30
Expected Annual EPS Growth Rate: 15%

Calculation:

PEG Ratio = 30 / 15 = 2.0

A PEG ratio of 2.0 indicates the stock may be overvalued relative to its growth expectations.

Example 2: Comparing Two Companies

Company A has a P/E ratio of 25 and a growth rate of 20%. Company B has a P/E ratio of 30 and a growth rate of 30%.

Company A PEG Ratio: 25 / 20 = 1.25
Company B PEG Ratio: 30 / 30 = 1.0

Comparison Insight:

Company B appears more attractively valued given its lower PEG ratio, indicating better growth potential relative to its price.

Example 3: Established Company Growth

An established consumer goods company has a stock price of $50, an EPS of $4, and projected growth of 5%.

P/E Ratio: $50 / $4 = 12.5
Expected Annual EPS Growth Rate: 5%

Calculation:

PEG Ratio = 12.5 / 5 = 2.5

This high PEG ratio might suggest that investors are overestimating the company's growth potential.

Practical Applications:

Valuation of Growth Stocks: Determine whether stocks in high-growth sectors are fairly priced based on expected earnings growth.
Diversification Decisions: Use the PEG ratio to identify stocks across sectors that offer competitive growth potential to enhance portfolio balance.
Investment Timing: Assess if current market prices accurately reflect anticipated growth and determine optimal entry points.
Performance Benchmarking: Use the PEG ratio to gauge company performance against peers, adjusting positions based on valuation discrepancies.
Screener Tool: Filter potential investment opportunities based on PEG ratios to find undervalued growth candidates.

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