Definition
The PEG ratio refines the P/E by incorporating growth, helping identify whether a high P/E is justified by strong earnings growth or represents overvaluation. A PEG of 1.0 suggests fair value relative to growth, below 1.0 suggests undervaluation, and above 1.0 suggests premium pricing.
functions Formula
PEG = P/E Ratio / Annual EPS Growth Rate (%)
lightbulb Example
A stock has a P/E of 30 and expected EPS growth of 25% per year. PEG = 30/25 = 1.2. A competitor with P/E of 20 and 10% growth has PEG = 2.0, making it relatively more expensive despite the lower P/E.
verified_user Key Points
- PEG < 1.0 often signals undervaluation relative to growth
- Uses forward growth estimates which can be unreliable
- Most useful for growth stock comparison
- Doesn't work well for cyclical or declining companies