Peg Ratio

What Is the Price/Earnings-to-Growth (PEG) Ratio?

The price/earnings to growth ratio (PEG ratio) is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while also factoring in the company’s expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio.

KEY TAKEAWAYS

• The PEG ratio enhances the P/E ratio by adding in expected earnings growth into the calculation.
• The PEG ratio is considered to be an indicator of a stock’s true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.
• The PEG for a given company may differ significantly from one reported source to another, depending on which growth estimate is used in the calculation, such as one-year or three-year projected growth.

How to Calculate the PEG Ratio
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PEG Ratio= P/E divided by EPS Growth
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where:
EPS = The earnings per share
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To calculate the PEG ratio, an investor or analyst needs to either look up or calculate the P/E ratio of the company in question. The P/E ratio is calculated as the price per share of the company divided by the earnings per share (EPS), or price per share / EPS. Once the P/E is calculated, find the expected growth rate for the stock in question, using analyst estimates available on financial websites that follow the stock. Plug the figures into the equation, and solve for the PEG ratio number.