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.

How can EV/EBITDA be used in conjunction with the P/E ratio?
Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >> 
What are some common accretive transactions?
The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >> 
What is the average pricetoearnings ratio in the retail sector?
According to NYU's Stern School of Business, as of January 2015, using trailing 12month data, the average pricetoearnings ... Read Full Answer >> 
What metrics are commonly used to evaluate companies in the retail sector?
Some of the most commonly used metrics to evaluate companies in the retail sector include the price/earnings to growth (PEG) ... Read Full Answer >> 
What is the average pricetoearnings ratio in the food and beverage sector?
The food and beverage sector includes diverse groups of companies specializing in producing different foods and beverages ... Read Full Answer >> 
How can I access a company's earnings report?
One of the most important tools in the arsenal of the fundamental investor is the company earnings report. The earnings report ... Read Full Answer >>

Stock Analysis
4 Cybersecurity Value Stocks to Watch For
Discover how huge data breaches to major companies have caused an upswing in the cybersecurity industry, and top stocks investors should watch. 
Fundamental Analysis
Calculating Basic Earnings Per Share
Basics earnings per share measures the amount of net income earned per share of outstanding stock. 
Stock Analysis
How To Analyze Netflix's Income Statements
Learn how to read Netflix's income statement, calculate net income and interpret EPS to evaluate the company's current financial condition. 
Fundamental Analysis
The Top 3 Reasons Southwest's Stock Is a 'Buy'
Discover the key differences between Southwest Airlines and other major U.S. airlines that have made Southwest a major business success. 
Stock Analysis
Kohl's: Does a Broken Stock Mean a Broken Company?
Kohl's stock is broken, but the company is strong. 
Investing Basics
What's a P&L Statement?
A profit and loss statement, also called the income statement, is a financial statement that companies use to report their income and expenses for a quarter or a year. 
Investing
PEG Ratio
Learn more about how this ratio is used to determine a stock's value based on its earnings growth. 
Markets
6 Bad Stock Buyback Scenarios
Buying back shares can be a sensible way for companies to use extra cash. But in many cases, it's just a ploy to boost earnings. 
Markets
The 5 Types Of Earnings Per Share
A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not. 
Fundamental Analysis
Assess Shareholder Wealth With EPS
Find out if management is doing its job of creating profit for investors.

PriceEarnings Ratio  P/E Ratio
The PricetoEarnings Ratio or P/E ratio is a ratio for valuing ... 
Earnings Per Share  EPS
The portion of a company's profit allocated to each outstanding ... 
Diluted Normalized Earnings Per Share
A company's profit less onetime earnings, divided by both outstanding ... 
Basic Earnings Per Share
A rough measurement of the amount of a company's profit that ... 
Primary Earnings Per Share (EPS)
One of two methods for categorizing shares outstanding. The other ... 
Interim Earnings Per Share
A measure of earnings calculated at a specified time, shorter ...