What is PEG Ratio?
The PEG Ratio adjusts the P/E ratio for growth. It divides P/E by earnings growth rate. A PEG under 1 might indicate undervaluation relative to growth potential.
Think of it like this
Two restaurants both have P/E of 20. Restaurant A grows 10% yearly (PEG = 2). Restaurant B grows 30% yearly (PEG = 0.67). Restaurant B offers better value for its growth!
Formula
PEG = P/E Ratio / Annual Earnings Growth Rate- P/E Ratio: Price-to-Earnings ratio
- Growth Rate: Expected annual earnings growth %
Why it matters
- Factors growth into valuation
- PEG < 1 might mean undervalued relative to growth
- Better than P/E for comparing growth stocks
- Popularized by Peter Lynch for finding bargains
What's a good value?
< 0.5
Very Undervalued
Potentially great value
0.5-1.0
Undervalued
Good value for growth
1.0-1.5
Fair Value
Reasonably priced
> 1.5
Overvalued
Expensive relative to growth
Real-world example
Netflix: P/E 40, Growth 20% = PEG 2.0 (expensive). Microsoft: P/E 30, Growth 15% = PEG 2.0 (fair for quality). Small cap: P/E 15, Growth 30% = PEG 0.5 (potential bargain).
Things to watch out for
- Growth estimates can be wrong
- Doesn't work for dividend stocks
- Less reliable for cyclical companies
- Different sources use different growth periods
Screen US stocks by PEG Ratio in the app, and see which companies pass right now.