What Is the PEG Ratio? Price/Earnings-to-Growth Formula Explained
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
The PEG ratio divides a stock's price-to-earnings ratio by its annual earnings per share growth rate, adjusting the earnings multiple so stocks with different growth speeds can be compared.
Key takeaways
- PEG ratio = P/E ratio ÷ annual EPS growth rate.
- A PEG of 1.0 means the P/E equals the growth rate. Below 1.0 is commonly read as undervalued relative to growth, and above 1.0 as overvalued.
- The result depends heavily on which growth rate is used: historical (trailing PEG) or projected (forward PEG), one-year or multi-year.
- A negative PEG comes from losses or shrinking earnings and has no useful valuation reading.
The PEG ratio (price/earnings-to-growth ratio) is a valuation metric that divides a stock’s price-to-earnings (P/E) ratio by the expected growth rate of its earnings per share over a specified period. It adjusts the earnings multiple for growth, so a high-P/E stock with fast earnings growth can have a lower PEG than a cheaper-looking, slower-growing stock.
How the PEG Ratio Works
The PEG Ratio Formula
PEG ratio = (Price per share ÷ EPS) ÷ EPS growth rate
The first part is the ordinary P/E ratio: share price divided by earnings per share (EPS). The second part is the annual percentage rate at which EPS is growing or expected to grow.
The growth rate goes into the formula as a whole number, not a decimal: 15% a year is entered as 15, not 0.15. Using the decimal would make every PEG 100 times too large.
How to Calculate the PEG Ratio
- Find the P/E ratio. Divide the current share price by EPS. Note whether the EPS is trailing (last 12 months or last fiscal year) or forward (next year’s estimate).
- Choose a growth rate. Use either historical EPS growth or analyst estimates of future growth. For a multi-year horizon, use the average annual (compounded) rate, not the cumulative total. Earnings that double over five years is roughly 15% a year, not 100%.
- Divide. P/E divided by the growth rate gives the PEG.
Forward PEG vs. Trailing PEG
- Trailing PEG uses past earnings growth. The inputs are reported results, but the past may be a poor guide if the business is speeding up or slowing down.
- Forward PEG uses projected growth, usually analyst consensus estimates over one, three or five years. It looks at what investors are actually paying for, but it is only as good as the forecast.
The same company can therefore show different PEG ratios across data sources, depending on whether they use a one-year forecast, a five-year forecast or historical growth. Before comparing PEG ratios across stocks, confirm they were built the same way.
Forward PEG should also not be confused with the forward P/E, which is simply price divided by next year’s estimated EPS. Forward P/E contains no growth adjustment. Forward PEG takes a P/E (trailing or forward) and divides it by projected growth.
Interpreting the PEG Ratio
The common benchmark comes from investor Peter Lynch, who argued in One Up on Wall Street that a fairly priced company’s P/E should roughly equal its growth rate. That relationship gives a PEG of 1.0. Under this rule of thumb:
- PEG below 1.0: the market is paying less per unit of growth than the growth rate would justify, which may indicate undervaluation.
- PEG around 1.0: price and growth are roughly in balance.
- PEG above 1.0: investors are paying a premium relative to expected growth, which may indicate overvaluation.
All else equal, a lower PEG is better. But 1.0 is a heuristic, not a law. What counts as cheap or expensive varies by industry and by type of company. Businesses with stable cash flows, strong balance sheets or dividends may justify a higher PEG than riskier companies growing at the same rate.
You can also run the formula backward. Dividing a stock’s P/E by a target PEG gives the growth rate the current price implies. A stock at a P/E of 30 needs about 30% annual earnings growth to reach a PEG of 1.0. Comparing that implied rate with what the business can realistically deliver is often more informative than the PEG figure itself.
Why the PEG Ratio Matters
The P/E ratio treats a company growing 5% a year and one growing 40% a year the same way. That makes fast-growing companies look expensive and slow-growing ones look cheap, even when the slower company is the poorer value. PEG puts growth into the comparison, so stocks with different growth profiles can be ranked on price paid per unit of growth. Many investors use it as a filter in a stock screener to shortlist growth companies that are not priced far ahead of their earnings.
Example of the PEG Ratio
Hypothetical example for illustration only.
Company X
- Share price: $60
- EPS this year: $3.00
- EPS last year: $2.40
Company Y
- Share price: $45
- EPS this year: $3.00
- EPS last year: $2.73
Calculations (trailing PEG, one-year historical growth):
| Company X | Company Y | |
|---|---|---|
| P/E | $60 ÷ $3.00 = 20 | $45 ÷ $3.00 = 15 |
| EPS growth | ($3.00 ÷ $2.40) − 1 = 25% | ($3.00 ÷ $2.73) − 1 ≈ 10% |
| PEG | 20 ÷ 25 = 0.8 | 15 ÷ 10 = 1.5 |
On P/E alone, Company Y looks cheaper. Once growth is included, Company X is the better value: investors pay 0.8 times its growth rate, compared with 1.5 times for Company Y. This assumes last year’s growth continues. If Company X’s 25% jump came from a one-off gain, a forward PEG based on realistic estimates could tell a different story.
Limitations of the PEG Ratio
- Forecast dependence. Forward PEG relies on analyst estimates, which can be too optimistic, especially for fast-growing technology companies. A small change in assumed growth moves the ratio sharply.
- Cyclical companies. Earnings at automakers, miners or chipmakers can swing widely through the business cycle. A trough-to-recovery rebound produces a very high growth rate and a misleadingly low PEG, while peak earnings do the opposite.
- Losses and negative growth. If EPS is negative or growth is expected to be negative, the PEG turns negative. That signals losses or shrinking earnings, not a bargain, and the number cannot be ranked against positive PEGs.
- Near-zero growth. When the growth rate is very small, dividing by it inflates the PEG to extreme values that say little.
- Ignores dividends and risk. PEG counts only earnings growth. Mature companies that return cash through dividends can look overvalued on PEG. A variant called the PEGY ratio adds dividend yield to the growth rate for this reason. PEG also says nothing about debt, earnings quality or competitive position.
PEG works best for companies with steady, predictable growth and should be read alongside other valuation measures.
FAQs
Is a PEG ratio of 0.62 good?
Under the Lynch rule of thumb, yes: the P/E is well below the growth rate, which suggests possible undervaluation. Check which growth estimate produced it, since a low PEG built on an aggressive forecast or a cyclical earnings rebound can disappear once growth normalizes.
The Bottom Line
The PEG ratio helps investors compare stocks with different growth rates, since P/E alone can make fast growers look expensive and slow growers look cheap. Before relying on a figure, check whether it uses trailing or forward growth, and treat 1.0 as a rough benchmark that varies by industry. PEG is most useful for companies with steady, predictable earnings and should be read alongside other valuation measures.
