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Price/Earnings to Growth ratio. A stock's P/E ratio divided by its earnings growth rate, showing if the price is reasonable for the company's growth.
Why It Matters
PEG takes the P/E ratio one step further by factoring in growth. A stock with a P/E of 40 seems expensive, but if earnings are growing 40% per year, the PEG is 1.0 — actually reasonable. Peter Lynch popularized the PEG ratio, considering a PEG below 1.0 undervalued and above 2.0 overvalued. It's especially useful for comparing growth stocks.
Key Points
- Calculate it: P/E Ratio ÷ Annual EPS Growth Rate (e.g., P/E 30 ÷ 15% growth = PEG 2.0)
- PEG below 1.0 may signal undervaluation; above 2.0 may signal overvaluation
- Works best for growth companies — less useful for mature, slow-growth businesses
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Related Terms
Common Questions
Price/Earnings to Growth ratio. A stock's P/E ratio divided by its earnings growth rate, showing if the price is reasonable for the company's growth. PEG takes the P/E ratio one step further by factoring in growth. A stock with a P/E of 40 seems expensive, but if earnings are growing 40% per year, the PEG is 1.
PEG takes the P/E ratio one step further by factoring in growth. A stock with a P/E of 40 seems expensive, but if earnings are growing 40% per year, the PEG is 1.0 — actually reasonable. Peter Lynch popularized the PEG ratio, considering a PEG below 1.0 undervalued and above 2.0 overvalued. It's especially useful for comparing growth stocks.
Calculate it: P/E Ratio ÷ Annual EPS Growth Rate (e.g., P/E 30 ÷ 15% growth = PEG 2.0)
PEG below 1.0 may signal undervaluation; above 2.0 may signal overvaluation
Works best for growth companies — less useful for mature, slow-growth businesses