Metric · Valuation

PEG Ratio Explained

Q: Why is the PEG ratio less certain than the P/E ratio?

Because it relies on a growth estimate for the future, while the P/E is based on already known, past earnings. If the growth estimate doesn't pan out, the PEG loses its informative value.

The PEG ratio (Price/Earnings-to-Growth) relates the P/E ratio to expected earnings growth. It answers whether a high P/E is justified by correspondingly high growth, rather than looking at the P/E in isolation.

Updated 20266 min read

Formula

PEG = P/E ÷ expected earnings growth (% p.a.)

< 1.0Attractive relative to growth

1.0–2.0Fairly valued

> 2.0Expensive relative to growth

Guideline values, industry-dependent, illustrative

The formula in detail

The components of the formula at a glance.

Numerator

P/E ratio

The stock's price-earnings ratio.

Denominator

Expected earnings growth

The expected annual earnings growth rate for coming years, in percent.

Calculator

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P/E ratioExpected earnings growth (% p.a.)

Result PEG

Fairly valued

1.3

A PEG below 1.0 is a classic signal that growth more than justifies the current P/E.

A PEG above 2.0 suggests the valuation has already run well ahead of expected growth.

Unlike the P/E ratio alone, PEG factors in the pace of growth. A high P/E need not be expensive if growth is correspondingly high.

Used in these strategies

PEG Strategy (Peter Lynch)Growth at a reasonable price: the P/E ratio relative to earnings growth.Balanced GARPThe middle ground between value and growth: steady growth at a fair price.

Frequently asked questions

What does a PEG of 1.0 mean?

A PEG of exactly 1.0 is considered a rule-of-thumb threshold: the P/E roughly matches the expected percentage earnings growth. The valuation appears neither particularly cheap nor particularly expensive.

Why is the PEG ratio less certain than the P/E ratio?

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Not investment advice. This explanation is for informational purposes only and does not constitute a recommendation to buy or sell securities.

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