# PEG Ratio Explained: Formula, Example & Interpretation

> The PEG (price/earnings-to-growth) ratio divides a stock's P/E ratio by its earnings growth rate. It answers what the P/E alone can't: is a high valuation justified by fast growth? A PEG around 1.0 is often considered fair value; below 1.0 may be undervalued relative to growth, and above 1.0 potentially expensive.

## Formula

**PEG Ratio = P/E Ratio ÷ Annual EPS Growth Rate (%)** — Growth rate is entered as a number, e.g. a 20% growth rate is 20.

## How to calculate

1. **Find the P/E ratio** — Divide share price by EPS.
2. **Find the EPS growth rate** — Take the expected annual earnings growth as a percentage (e.g. 20 for 20%).
3. **Divide** — Divide the P/E by the growth rate to get the PEG.

## Worked example

A stock has a P/E of 30 and is growing earnings 25% a year. Its PEG = 30 ÷ 25 = 1.2. A rival with a P/E of 15 growing at 5% has a PEG of 3.0 — so despite the lower P/E, the rival is actually more expensive relative to its growth.

## Interpretation

PEG level Interpretation Below 1.0 Potentially undervalued relative to its growth Around 1.0 Often considered fairly valued Above 1.0 (esp. >2) Growth may not justify the price PEG is especially useful for comparing growth stocks that all look "expensive" on P/E alone. It reframes the question from "how expensive?" to "how expensive for the growth you get?"

## Limitations

- Only as reliable as the growth estimate, which is uncertain and can change.
- Breaks down for low- or no-growth companies (division by a tiny or negative number).
- Ignores dividends — a variant (PEGY) adds dividend yield to the growth rate.
- Doesn't account for differences in growth quality or risk.

## FAQ

**What is a good PEG ratio?** A PEG around 1.0 is traditionally seen as fair value, with below 1.0 potentially undervalued relative to growth. Like all ratios, compare within the sector and treat the growth estimate with caution.

**Why is PEG better than P/E for growth stocks?** P/E ignores growth, so fast-growing companies always look expensive on P/E. PEG divides P/E by the growth rate, letting you compare a stock's valuation against how quickly it's actually growing.

**What growth rate should I use in PEG?** Most investors use the expected forward annual EPS growth rate (often a 3–5 year estimate). Using a longer-term, realistic growth figure produces a more stable, meaningful PEG than a single volatile year.

## Related metrics

- P/E Ratio (/learn/pe-ratio)
- EPS (/learn/eps)
- Value vs. Growth Investing (/blog/value-investing-vs-growth-investing)

See PEG for any stock free: https://foliofundamentals.com/analyzer