Loading the player...

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 taking the company's earnings growth into account, and is considered to provide a more complete picture than the P/E ratio.

BREAKING DOWN 'Price/Earnings To Growth - PEG Ratio'

While a low P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratio can tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. The degree to which a PEG ratio value indicates an over or underpriced stock varies by industry and by company type, though a broad rule of thumb is that a PEG ratio below one is desirable. Also, the accuracy of the PEG ratio depends on the inputs used. Using historical growth rates, for example, may provide an inaccurate PEG ratio if future growth rates are expected to deviate from historical growth rates. To distinguish between calculation methods using future growth and historical growth, the terms "forward PEG" and "trailing PEG" are sometimes used.

Below we show you the three companies with the highest and lowest PEG ratios in the S&P 500. This information is updated daily so be sure to return or visit our Markets page to keep updated on various companies and decide which stocks to add to your Watchlist or even invest in.

 

PEG Ratio Calculation Examples

To calculate the PEG ratio, and investor or analyst needs to first 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):

P/E ratio = Price per share / EPS

Once the P/E is calculated, the PEG ratio's formula is simply:

PEG ratio = P/E ratio / earnings growth rate

Assume the following data for two hypothetical companies, Company A and Company B:

Company A price per share = $46

Company A EPS this year = $2.09

Company A EPS last year = $1.74

Company B price per share = $80

Company B EPS this year = $2.67

Company B EPS last year = $1.78

Given this information, the following data can be calculated for each company:

Company A P/E ratio = $46 / $2.09 = 22

Company A earnings growth rate = ($2.09 / $1.74) - 1 = 20%

Company A PEG ratio = 22 / 20 = 1.1

Company B P/E ratio = $80 / $2.67 = 30

Company B earnings growth rate = ($2.67 / $1.78) - 1 = 50%

Company B PEG ratio = 30 / 50 = 0.6

Many investors may look at Company A and find it more attractive since it has the lower P/E between the two companies. But compared to Company B, it doesn't have a high enough growth rate to justify its P/E. Company B is trading at a discount to its growth rate and investors purchasing it are paying less per unit of earnings growth.

Get more acquainted with the PEG ratio by reading PEG Ratio Nails Down Value Stocks and How To Find P/E And PEG Ratios.

RELATED TERMS
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. P/E 30 Ratio

    P/E 30 ratio means that a company's stock price is trading at ...
  3. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  4. P/E 10 Ratio

    The P/E 10 ratio is a valuation measure, generally applied to ...
  5. Combined Ratio

    Combined ratio is a measure of profitability used by an insurance ...
  6. Key Ratio

    A mathematical ratio that illustrates and summarizes the current ...
Related Articles
  1. Investing

    Beware False Signals From the P/E Ratio

    The P/E ratio is a simple tool for evaluating a company, but it can also send false signals.
  2. Investing

    How Do I Calculate the Price-Earnings 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...
  3. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  4. Investing

    5 Must-Have Metrics for Value Investors

    These quick-and-dirty ratios will help you find the most undervalued stocks on the market.
  5. Investing

    Are Stocks with Low P/E Ratios Always Better?

    Is a stock with a lower P/E ratio always a better investment than a stock with a higher one? The short answer is no. The long answer is it depends.
  6. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  7. Investing

    Explaining Forward Price-to-Earnings Ratio

    The estimated P/E of a company is often used to compare current earnings to estimated future earnings.
  8. Investing

    Profit With The Power Of P/E Ratio

    The P/E ratio is a valuable tool when deciding on an investment, but it's not the only thing to consider.
  9. Investing

    Is Stock With a Lower P/E Always A Better Choice?

    Is a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things.
RELATED FAQS
  1. How can the price-to-earnings (P/E) ratio mislead investors?

    A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >>
  2. What is the average price-to-earnings ratio in the oil & gas drilling sector?

    Investing in the energy sector provides an opportunity for value investors, but it is necessary to understand metrics such ... Read Answer >>
  3. What are common growth rates that should be analyzed when considering the future ...

    Learn about some of the most commonly used measures for evaluating a company's future growth prospects and analyzing it as ... Read Answer >>
  4. What is the average price-to-earnings ratio in the financial services sector?

    Learn how to calculate and use the price to earnings (P/E) ratio when analyzing an investment and what the financial services ... Read Answer >>
  5. How do I calculate the P/E ratio of a company?

    The P/E ratio shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares ... Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center