PEG Ratio Calculator
Use this tool to calculate the Price/Earnings to Growth (PEG) Ratio. The PEG Ratio is a widely used valuation metric that relates a company's stock price (via its P/E ratio) to its expected earnings growth rate.
Enter the company's current Price-to-Earnings (P/E) Ratio and its expected future Earnings Growth Rate (%) to calculate the PEG Ratio.
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Understanding the PEG Ratio
What is the PEG Ratio?
The PEG (Price/Earnings to Growth) Ratio is a stock valuation measure invented by investor Peter Lynch. It's used to determine if a stock's price is high or low relative to its expected earnings growth rate. Unlike the P/E ratio alone, the PEG ratio accounts for future growth, making it particularly useful when comparing companies with different growth trajectories.
PEG Ratio Formula
The formula is simple:
PEG Ratio = (P/E Ratio) / (Annual Earnings Growth Rate %)
Note: The growth rate in the denominator is typically the percentage value directly (e.g., 15 for 15%), but for mathematical calculation, you divide the P/E by the *decimal* representation of the growth rate (e.g., 15 / 100 = 0.15). Our calculator uses the percentage value as input and handles the division by 100 internally.
Interpreting the PEG Ratio
- PEG < 1: Often suggests the stock is undervalued relative to its expected growth.
- PEG ≈ 1: May suggest the stock is fairly valued.
- PEG > 1: Often suggests the stock is overvalued relative to its expected growth.
- PEG for Growth <= 0: The PEG ratio is typically not meaningful or is undefined when a company has zero or negative expected earnings growth. It's primarily used for growth stocks.
It's important to use the PEG ratio as one tool among many and compare companies within the same industry or sector.
PEG Ratio Examples
See how the PEG Ratio is calculated for different scenarios:
Example 1: Growth Stock (Undervalued?)
Scenario: A tech company with high growth expectations.
1. Known Values: P/E Ratio = 30, Expected Growth Rate = 25%.
2. Formula: PEG = P/E / Growth Rate %
3. Calculation: PEG = 30 / 25
4. Result: PEG = 1.20
Interpretation: The PEG ratio is slightly above 1, suggesting it might be slightly overvalued based purely on this metric, although growth stocks often trade at a premium.
Example 2: Stable Company (Fairly Valued?)
Scenario: A mature company with moderate, steady growth.
1. Known Values: P/E Ratio = 18, Expected Growth Rate = 10%.
2. Formula: PEG = P/E / Growth Rate %
3. Calculation: PEG = 18 / 10
4. Result: PEG = 1.80
Interpretation: A PEG ratio of 1.80 is above 1. This might suggest it's overvalued relative to its growth, or that investors value its stability over rapid growth.
Example 3: Potential Bargain?
Scenario: A company whose stock price hasn't fully reflected its expected strong growth.
1. Known Values: P/E Ratio = 20, Expected Growth Rate = 30%.
2. Formula: PEG = P/E / Growth Rate %
3. Calculation: PEG = 20 / 30
4. Result: PEG ≈ 0.67
Interpretation: A PEG ratio below 1 suggests the stock might be undervalued relative to its expected growth rate, potentially indicating a good investment opportunity according to this metric.
Example 4: Low P/E, Moderate Growth
Scenario: A company with a low P/E ratio but only modest expected growth.
1. Known Values: P/E Ratio = 10, Expected Growth Rate = 8%.
2. Formula: PEG = P/E / Growth Rate %
3. Calculation: PEG = 10 / 8
4. Result: PEG = 1.25
Interpretation: Despite the low P/E, the PEG ratio is above 1 when accounting for the slower growth.
Example 5: High P/E, Very High Growth
Scenario: A high-flying stock with a large P/E ratio justified by rapid expansion.
1. Known Values: P/E Ratio = 50, Expected Growth Rate = 40%.
2. Formula: PEG = P/E / Growth Rate %
3. Calculation: PEG = 50 / 40
4. Result: PEG = 1.25
Interpretation: Even with a P/E of 50, the high expected growth rate brings the PEG down to 1.25, which is still above 1 but potentially acceptable for aggressive growth investors.
Example 6: P/E of Zero (Losses)
Scenario: A company currently losing money (negative earnings), resulting in a P/E of 0 (or undefined, but often shown as 0 in some screens). Assuming P/E is shown as 0 for simplicity in this example.
1. Known Values: P/E Ratio = 0, Expected Growth Rate = 10%.
2. Calculation: Division by Growth Rate %.
3. Result: PEG = 0 / 10 = 0
Interpretation: A PEG ratio of 0 when P/E is 0 is technically correct by the formula, but like cases with non-positive growth, the PEG ratio is generally not a meaningful valuation tool for companies currently unprofitable.
Example 7: Comparing Two Companies
Scenario: Compare Company A (P/E 20, Growth 15%) and Company B (P/E 25, Growth 20%).
1. Company A: PEG = 20 / 15 ≈ 1.33
2. Company B: PEG = 25 / 20 = 1.25
Conclusion: Based solely on the PEG ratio, Company B appears slightly more attractive (slightly lower PEG) relative to its growth than Company A, despite having a higher P/E ratio.
Example 8: Very Low Growth
Scenario: A utility company with very stable but low expected growth.
1. Known Values: P/E Ratio = 14, Expected Growth Rate = 3%.
2. Formula: PEG = P/E / Growth Rate %
3. Calculation: PEG = 14 / 3
4. Result: PEG ≈ 4.67
Interpretation: A very high PEG ratio. This is expected for companies with low growth; the PEG ratio is less relevant here than for growth stocks.
Example 9: P/E = 0, Growth > 0
Scenario: Similar to Example 6, but emphasizing the P/E of 0.
1. Known Values: P/E Ratio = 0, Expected Growth Rate = 5%.
2. Formula: PEG = P/E / Growth Rate %
3. Calculation: PEG = 0 / 5
4. Result: PEG = 0
Interpretation: Again, PEG is 0. Not useful for companies with zero or negative earnings.
Example 10: Growth Rate = 0 (or Negative)
Scenario: A company expected to have no growth or shrinking earnings.
1. Known Values: P/E Ratio = 15, Expected Growth Rate = 0% (or -5%).
2. Calculation: Division by zero or a negative number.
3. Result: PEG is undefined or not meaningful.
Interpretation: The PEG ratio is specifically for companies with *positive* expected growth. It cannot be calculated or interpreted in the standard way if growth is zero or negative.
Frequently Asked Questions about the PEG Ratio
1. What does PEG stand for?
PEG stands for Price/Earnings to Growth Ratio.
2. What is the formula for the PEG Ratio?
PEG Ratio = (Price-to-Earnings Ratio) / (Expected Annual Earnings Growth Rate %).
3. Who developed the PEG Ratio?
The PEG Ratio was popularized by legendary investor Peter Lynch.
4. How do you interpret a PEG Ratio of 1?
A PEG Ratio of approximately 1 is often interpreted as the stock being fairly valued, suggesting that its P/E ratio is in line with its expected earnings growth rate.
5. What does a PEG Ratio less than 1 mean?
A PEG Ratio less than 1 can indicate that a stock is undervalued relative to its expected growth rate. It suggests you are paying less for each unit of expected future earnings growth.
6. What does a PEG Ratio greater than 1 mean?
A PEG Ratio greater than 1 can suggest that a stock is overvalued relative to its expected growth rate. It implies investors are paying a premium for the expected future earnings growth.
7. Is the PEG Ratio useful for all stocks?
No, the PEG Ratio is primarily useful for growth stocks or companies with positive expected earnings growth. It is not meaningful or applicable for companies with unstable, zero, or negative earnings growth.
8. What expected growth rate should I use?
Analysts often use the consensus analyst forecast for the next 3-5 years. However, different sources may provide different estimates, and future growth is always uncertain. Consistency is key when comparing companies.
9. How does the PEG Ratio improve upon the P/E Ratio?
The PEG Ratio adds the dimension of expected growth to the P/E Ratio. A high P/E stock might be justified if its growth is also very high, while a low P/E stock might still be overvalued if its growth is minimal or negative. PEG helps provide context for the P/E based on growth.
10. Are there limitations to using the PEG Ratio?
Yes. It relies on *expected* future growth, which is uncertain and can be inaccurate. Different growth rate sources give different results. It doesn't account for debt, profitability margins, industry factors, or overall economic conditions. It's best used in conjunction with other valuation metrics and analysis.
