Remember that the price/earnings to growth ratio (PEG ratio) is simply a given stock's price/earnings ratio (P/E ratio) divided by its percentage growth rate. The resulting number expresses how expensive a stock's price is relative to its earnings performance.
For example, let's say you're analyzing a stock trading with a P/E ratio of 16. Suppose the company's earnings per share (EPS) have been and will continue to grow at 15% per year. By taking the P/E ratio (16) and dividing it by the growth rate (15), the PEG ratio is computed to be 1.07. But things are not always so straightforward when it comes to determining which growth rate should be used in the calculation. Suppose instead that your stock had grown earnings at 20% per year in the last few years, but was widely expected to grow earnings at only 10% per year for the foreseeable future. To compute a PEG ratio, you need to first decide which number you will plug into the formula. You could take the future expected growth rate (10%), the historical growth rate (20%) or any kind of average of the two.
Let's explain the two methods that are commonly used. The first is to use a forwardlooking growth rate for a company. This number would be an annualized growth rate (i.e. percentage earnings growth per year), usually covering a period of up to five years. Using this method, if the stock in our example was expected to grow future earnings at 10% per year, its forward PEG ratio would be 1.6 (16 divided by 10). You might also see people using another method, in which the stock's trailing PEG ratio is reported, calculated by using trailing growth rates. The trailing growth rate could be derived from the last fiscal year, the previous 12 months or some sort of multipleyear historical average. Turning again to the stock in our example, if the company had grown earnings at 20% per year for the past five years, we could use that number in the calculation, and the stock's PEG would be 0.8 (16 divided 20).
Neither one of these approaches to PEG ratio calculation is wrong  the different methods simply provide different information. Investors are often concerned about what price they are paying for a stock relative to what it should earn in the future, so forward growth rates are often used. However, trailing PEG ratios can also be useful to investors, and they avoid the issue of estimation in the growth rate since historical growth rates are hard facts.
Regardless of what type of growth rate you use in your PEG ratios, what matters most is that you apply the same method to all the stocks you look at, to ensure that your comparisons are accurate. You should also bear in mind that PEG ratios will vary by industry and company type, so there is no universal standard for PEG ratios that determines whether a stock is under or overpriced. Generally speaking, however, a PEG ratio of less than 1 suggests a good investment, while a ratio over 1 suggests less of a good deal. Remember, PEG ratios don't tell you anything about the future prospects of a company (i.e. a company sure to go bankrupt will likely have a very low PEG ratio, but that doesn't mean it's a good investment).
For further reading, check out Move Over P/E, Make Way For The PEG and How The PEG Ratio Can Help Investors.

What is considered a good PEG (price to earnings growth) ratio?
Learn about the price/earnings to growth (PEG) ratio and understand what investors and market analysts consider a good ratio ... Read Answer >> 
Over what duration should I be examining a given stock's PEG (price to earnings growth) ...
Learn how the PEG ratio provides an assessment of a stock's current price based on its trailing or projected earnings growth ... Read Answer >> 
How do I use the PEG (price to earnings growth) ratio to determine whether a stock ...
Using the PEG, or price/earnings to growth, ratio provides a better picture of a stock's valuation versus simply relying ... Read Answer >> 
Stocks with high P/E ratios can be overpriced. Is a stock with a lower P/E always ...
The short answer? No. The long answer? It depends.The pricetoearnings ratio (P/E ratio) is calculated as a stock's current ... Read Answer >> 
How do stock dividends affect the retained earnings account?
Understand the difference between financial ratio analysis and accounting ratio analysis. Learn why ratio analysis is important ... Read Answer >>

Investing
PEG Ratio Nails Down Value Stocks
Learn how this simple calculation can help you determine a stock's earnings potential. 
Investing
PEG Ratio
Learn more about how this ratio is used to determine a stock's value based on its earnings growth. 
Investing
Stock Valuations 101: Price to Earnings Ratio
Understanding stock valuations is essential to uncovering worthy portfolio candidates. Ignore them at your own risk. 
Investing
Biggest Real Estate Operations Sector Movers for July 3, 2012
The market is on the rise this morning. The Nasdaq has climbed 0.7%; the S&P 500 has increased 0.7%; and the Dow is trading up 0.6%. Underperforming the market overall, the Real Estate Operations ... 
Investing
The 4 Basic Elements Of Stock Value
The ancient Greeks considered earth, fire, air and water the building blocks of all matter. Here are the four basic elements to break down a stock’s value. 
Investing
ASML Holding N.V and Other Big Movers In Semiconductors on August 28, 2012
The Nasdaq has fallen 0.1%, the S&P 500 is down 0.1% and the Dow has declined 0.1%, marking a bad morning for the market. The Semiconductors sector (XLK) is down 0.2%, underperforming the market ... 
Investing
6 Basic Financial Ratios And What They Reveal
These formulas can help you pick better stocks for your portfolio once you learn how to use them. 
Investing
How Do I Calculate the PriceEarnings Ratio?
If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as... 
Investing
The Price To Earnings Ratio Explained
The price to earnings ratio is one of the most important ratios in investing. Find out how it is calculated, how it can be used and what it tells investors about a particular stock.

Price/Earnings To Growth  PEG Ratio
Price/Earnings to Growth (PEG) is a stock's price to earnings ... 
PriceEarnings Ratio  P/E Ratio
The PricetoEarnings Ratio or P/E ratio is a ratio for valuing ... 
Ratio Analysis
A ratio analysis is a quantitative analysis of information contained ... 
Current Ratio
The current ratio is a liquidity ratio measuring a company's ... 
Adjustable Peg
An exchange rate policy adopted by some countries wherein the ... 
Policyholder Dividend Ratio
The policyholder dividend ratio is a measurement of the profitability ...