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. P/E 30 Ratio

    P/E 30 ratio means that a company's stock price is trading at ...
  2. Forward Price To Earnings - Forward ...

    Forward price to earnings (forward P/E) is a measure of the price-to-earnings ...
  3. P/E 10 Ratio

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

    Combined ratio is a measure of profitability used by an insurance ...
  5. Accounting Ratio

    Accounting ratios, also known as financial ratios, are used to ...
  6. Operating Ratio

    A ratio that shows the efficiency of a company's management by ...
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

    How to Find P/E And PEG Ratios

    If calculating the P/E and PEG ratios have you in the dark, these easy calculations should help.
  4. 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 ...
  5. Investing

    5 must-have metrics for value investors

    In this article, we outline the five ratios that can help value investors find the most undervalued stocks in the market.
  6. 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.
  7. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
RELATED FAQS
  1. What is the average price-to-earnings ratio in the banking sector?

    Explore the price/earnings ratio in regard to the banking industry and learn what the average P/E ratio is for most banking ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center